Decentralising of risks

The massive 7 hour failure of the ATM system of DBS on 5 July 2010 highlight the danger of concentration of risk and "too big to fail".

Is there an alternative approach? Do we need to have fewer and larger banks to compete internationally? Is it beneficial for banks to get bigger?

Here are the negative impacts of the consolidation of banks in recent years:

• concentration of risks
• overcharging of fees for banking services, i.e abuse of pricing power
• selling of bad structured products to earn commission
• impact of massive IT failure on cash withdrawals, i.e. the DBS event

The growth of large banks lead to less competition, not more competiton. It has allowed the banks to make super profits at the expense of consumers. The large salaries paid by banks have also distorted the employment market as most talents preferred to work in the banks, instead of manufacturing and services.

Is there an alternative? America had a system of community banks that are connected by national banks. Perhaps, this is the answer. We should encourage a large number of community banks to serve the retail customers on basic banking services. They can be linked a few national banks who handle the commercial banking, foreign exchange, international trade and other services.

If there is a serious computer hiccup in a community bank, it will only affect their customers, and not a large segment of the population. This is an example of decentralising the risks.

Tan Kin Lian