Why bigger really is better: 5 arguments in support of big banks

Article Category: Finance  |   

Front of a bank - photo

Back in 2008, the world had what can best be described as a ‘financial blip’. Following what was really a meltdown in financial institutions, many industry analysts decided it was high time that the big banking groups were broken down into smaller, more accountable organizations.

The basic premise was: the big players caused the problems and, following massive injections of capital, refused to help the little guy on the street - aka you and I.

Although things have come back to what could be called reasonably normal, there are quite a few experts still clamouring for the breakup of the big banks. But they’re wrong and here’s why I think financial houses should be allowed to continue as lumbering behemoths.

How Much Coverage Does A Small Bank Have?

For most of us, this is probably our biggest concern. Whilst the idea of the big five financial institutes effectively controlling the market may leave a bitter taste in your mouth, you do have to agree that they are making banking easy for their customers. Ask yourself this: does your local, 'family run since 1888' bank have ATMs or branches across the world or, even, across the entire country? It's a simple fact that big banks do tend to have the best coverage. If you never intend to use anything but cash and/or stray more than ten miles from your hometown then small might be the way to go.

Can Small Banks Really Protect Your Money?

One really contentious aspect of the financial crisis was the way in which the governments bailed out the banks to protect the economy (and our money) only for the bankers to hoard the cash. One obvious, but overlooked, point to consider is this: the direction the money flowed in. The US Treasury used taxpayers' money to shore up the finances of the BIG banks. Sure, the smaller banks may not have needed the cash when the crunch came, but, doing this all over again, do you think the government is going to pour cash into an organisation that ranks as a minnow on the fisherman's scale of banking? 

Are Smaller Really More Flexible?

One thing I've noticed time and time again is how smaller banks are positioned as being more human and friendly. What I don't hear is how competitive they are. Take interest rates on your loans, for example - why do you think the big five can offer you the lowest interest rates? Because they have financial clout. Sure, the LIBOR does level the playing field a little but when you've got hundreds of billions of dollars in reserve you can afford to undercut your smaller competitors.

How Mobile Is Your Money?

Another, big disadvantage that comes attached to small banks is the lack of mobility, tied in very closely with coverage. For a moment, let's imagine that you've decided to move to the other side of the country. You've had an account with a small bank since your were a child and you like their friendly, caring approach to banking. A few weeks before you move, you stop by your bank and ask how to find their nearest branch to your new house. But they don't have one. They only operate in your local county. Now you have the inconvenience of shifting your accounts to a new bank.

Big Banks Are More Stable

Yes, I know that's not 100% per cent true but, in the vast majority of cases, it is. Big banks have deep pockets and these pockets are lined with hundreds of billions of dollars of their customers' money. These vast sums of money not only help the bank protect itself in harsh economic times but also make it more competitive. You see, using this money, they can compete against other global banks in markets all over the world. In return they generate even greater profits that, hopefully, should come back to you in the form of improved interest on your savings account.

Most People Really Don’t Care

Ok, I said five but here’s a bonus for you: this point is less of an argument in favour of big banking companies and more of a reflection on current thinking: most of us don’t care. You’re getting good returns on your savings, you’ve never had a problem with your bank and, to be honest, moving to a smaller organisation just to smooth your ruffled, ethical feathers is, well, a bit too much effort.

Even if you’ve had your fingers burned by your bank at some point in the past can you honestly say the first thing you did was to take your custom elsewhere? If you’re like me, and the vast majority of the population, then you simply got angry, vented a little steam and forgot about it. In fact, a survey carried out in early 2013 showed only 12% of customers were actively looking to move their accounts.

I understand that, for many readers, the reasons for choosing a small bank in which to save your money can be nuanced and, sometimes, based on ethical decisions but you can't deny that saving with a larger organisation does still have a lot to offer.

Written by James Redden

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Last update: 08 December 2013

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