Amidst the ongoing talks of consolidating small state-run banks to create one or two globally large size banks, Reserve Bank Governor D Subbarao on Tuesday cautioned against making a ‘too-large-to-fail’ bank, saying what is needed is not a monopolist but a number of comparatively large banks.
Citing the 2008 credit crisis, which was triggered by too-big-to-fail banks, Subbarao said, “we don’t need monopolies, instead we need four-five banks of big size, as large banks can become too-big-to-fail, leading to moral hazard problems.”
He said that “too large banks lead to complexity and too-big-to-fail or too-connected-to-fail moral hazards with adverse impact on financial stability.”
While consolidation brings in higher capital base facilitating increased lending activity and faster GDP growth, apart from boosting infra financing, and meeting the demands of corporates at home and globally, he said it also brings in regulatory issues.
“Significantly big banks can resort to monopolistic practices that may result in unequal competition and distortive and even predatory behaviour in the market. Such practices can also blunt the monetary transmission and market mechanism for efficient allocation of resources,” he said, while addressing a FICCI-organised banking summit in Mumbai.
“It may take years for our banks to become global players by way of organic growth. However, we should aspire to have a few Indian multinational banks in the near future by selective acquisition, as large banks may dilute benefits of competition.”
Finance Minister P Chidambaram had, in May, called for consolidation in banking sector to create a few large global-sized banks saying it is needed for a growing economy.