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 banks-to-fail’, 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 also said “too large banks lead to complexity and too-big-to-fail or too-connected-to-fail moral hazards with adverse impact on financial stability”.

He said though consolidation brings in higher capital base facilitating increased lending activity and faster GDP growth, apart from boosting infra financing, and meet demands of corporates, but 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.

He further added that since the first round of bank nationalisation in 1969, there were 41 mergers and amalgamations in the sector, out of which 17 happened before the onset of reforms in 1991 and 24 after that.

Of these, 3 mergers and amalgamations were between public sector banks, 24 between private banks with public sector banks and 14 between private banks.

He said “our second largest bank is almost one-third the size of the biggest bank (SBI). This creates a monopolistic situation.

“The task is to ensure that there are at least four-five banks of comparable size at all times to ensure that consolidated banks do not acquire monopolistic market power, adopt predatory behaviour and force smaller banks into unviable models,” Subbarao said.