10/16/2009 05:12 am ET | Updated May 25, 2011

Are Banks Too Big? Don't Count on Them Downsizing Anytime Soon

A trillion dollars is not what it used to be, which is why any
regulator concerned about moral hazard has his work cut out for him.

Twenty-one banks have trillion-plus balance sheets,
according to Of those, only three are based in the U.S.*
Forty banks hold assets in excess of $600 billion, the size of Lehman Brothers’
balance sheet at the point when its Chapter 11 filing set off a global
financial panic. In other words, there are an awful lot of financial
institutions that are that are too big to fail.

If a bank is too big to fail, is it too big? The Washington Post posed that question recently.
If the answer is yes, then the solution is international. 

Taking note of something that was obvious a year ago, when the shot
gun bank mergers were announced, the Post reported that JPMorgan Chase, Bank
of America, and Wells Fargo have increased their market shares after acquiring
Washington Mutual, Merrill Lynch, and Wachovia respectively.  

Yes, these U.S. banks are huge.  But the Post’s analysis was somewhat provincial. A single
bank in Edinburgh, Royal Bank of Scotland, is larger than JPMorgan and BofA
combined, according to Bankersalmanac.



Foreign banks are not only big, they have much more of an
international presence. Foreign banks control over 30% of the $15 trillion of
the financial assets held by banks in the U.S., according to the IMF.  European and U.K. banks hold about a
third of their assets outside of their home country; for American banks, its
only 13 percent. European banks have a much bigger presence in emerging

What are the chances that Timothy Geithner, if he were so
inclined, would get a favorable response if he approached his counterpart in
France and asked, “I’ll break up Chase and BofA into a bunch of $500 billion
banks, if you’ll do the same with BNP, Agricole and Societe Generale,”? My
hunch is that the French, or any other member of the G8, would preface their,
“No thank you,” with an icy stare.

In a certain respect, a bank’s international presence
reflects its host country’s international influence. Financial ministers are
very conscious of prestige. Despite all the handwringing about systemic risk
from overly large and interrelated financial institutions, governments don’t
seem to be dissuaded from the longstanding notion that, for banks, bigger is

Of course, the U.S. government can act unilaterally if it
wants to address the moral hazard issue by reducing the concentration of power among the largest U.S. financial institutions. But I wouldn’t count
on it.

*The listing above is skewed in several respects. First, it did not combine Wells Fargo and Wachovia as a single bank, which would have put four U.S. banks in the trillion-plus category. The Federal Reserve, which ranks bank holding companies (as opposed to banks) according to their asset size, shows that the U.S. institutions are appreciably larger. However the larger point, that most of the huge financial institutions are based outside the U.S., still holds.