Shopping for banking trouble

Shopping for banking trouble

The financial supermarket may be dead in the West. But long live such a supermarket in India.

That seems to be what Union home minister P. Chidambaram, who was finance minister, was suggesting, when he emphasized the importance of consolidating India’s banking sector this week. “We are not letting (banks) consolidate…because of our timidity, because of fear of unknown", he said. Well, some fears aren’t unknown any more. Chidambaram himself, ironically, pointed to them.

In the same speech, he noted his earlier recommendation to State Bank of India to buy Citigroup shares when they were trading around $1 in early 2009—a cheap investment that would reap returns as the US bank’s stock rebounded.

Today, Citi has become the poster child for the US banking system’s mismanagement. Its stock trades as low as $3.35, and it’s the only US bank to have not returned government capital. Yet, before the crisis began in mid-2007, with stock trading at $52, it was the poster child for consolidation’s virtues.

To be fair, the consolidation Citi underwent may not exactly be what Chidambaram has in mind. Citi’s “supermarket"—the universal banking model where the same entity offers many services (asset management, mutual funds)—is different from a simple merger or acquisition. Still, there are parallel concerns.

First, Citi was able to marshal $1.9 trillion worth of assets under one roof through mergers and acquisitions. This gave it the ability to finance?large projects— what the finance ministry wants of India’s banks—but also put it all under one board’s control, reducing oversight. Citi’s top executives were unaware of the extent of its toxic assets.

Second, too big means too big to fail. Besides this systemic risk (Citi was part of the heart attack the US financial system suffered in 2008), the government also has to spend more to recapitalize failing banks. Last year, India took a World Bank loan to do so.

Third, consolidation needn’t help financial inclusion. Commentators have noted that Citi’s supermarket tried to sell many products to the same customer, instead of to many customers. As Reserve Bank of India deputy governor K.C. Chakrabarty said last year, combining two Indian banks could mean, say, shutting one branch, slowing inclusion. At this point, what is more urgent for India: more customers at the existing store, or a larger supermarket?

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