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 Bankersalmanac.com. 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 markets.

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 better.

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 Bankersalmanac.com 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.

 

 

Comments

[Sundialsvc4]

Obviously there are multiple sides to the banking industry, and one of those sides certainly favors an economy of scale. However, it is wrong to aver that all banking institutions must be as large as conceivable. It is also wrong to assert or to imply that, just because the business of banking is inherently international, it should not be subject to the laws and the customs of the countries in which the banks may choose to operate.

A fundamental reason for this concern is a simple one: this is money we're talking about. The ultimate embodiment of power over another human being ... or, over hundreds of millions of them. To the extent that such a thing is left without law-enforcement, crime will flourish in it, and by doing so, will tear it completely apart to the detriment of one and all. The common man will find himself defenseless against usury, swindling, fraud, and a legion of other crimes. Businesses will find themselves subject to extortion as they endeavor to ply their trades.

Even as bankers clamor to insist that they must be "free of regulation and government interference," I assert that they can never hope to succeed if they are subject only to the prodding of their conscience. Human nature WILL defeat them, as it has done throughout all of history.

[Aaror]

OK, let them be too big to fail, but when we have to bail them out, we eliminate all existing stock and convert the bondholders to stockholders. Everyone who invested in the "too big to fail," loses money and the Taxpayer doesn't!

[RandVictims]

The entire world is slowly shedding Reagan Capitalism, Japan being both the most recent and most significant. The longer Obama wobbles, the farther our country will sink into irrelevance.

As ugly as it promises to be, the banks have to be reformed.

[sonofsamphm1c]

"Too big to fail" is a horrible description for why the big banks could not be allowed to fail. It is not their size; it's their externalities.

Breaking them up will not decrease the interconnectedness of the modern economy, and it will make us less competitive, which means fewer jobs.

There is no lack of community banks.

[tompoe]

Taxpayers won't have to pay banks trillions of dollars. Do you really think they're going to stop the bleeding as long as they stay in existence? Breaking up banks means smaller banks share the customer base. Communities benefit by keeping the local economy humming along. Life will be good. You'll like it. Just a simple signature on an executive order, followed by some tidying up in Congress and all's well that ends well.

[Baltotoast]

You really don't understand what is going on here. Domestic consumer banking is a sideshow relative to global banking for corporations and individuals. Community banks serve communities. Global banks serve the global economy. How is your local community bank going to do complex currency swaps?

[Baltotoast]

FINALLY, a post that understands our banks operate in a global marketplace and that regulation has to be international. Lets not lose another industry to global competitors.

[FreedomCorpse]

Oh Dave, you're being too kind. The graph of the notional value of derivatives contracts held by the financial institutions can be seen in the graph in this link: http://news.goldseek.com/GoldSeek/1251750600.php

The chart in your article understates the real issue which are derivatives and the counterparty risk.

[sonofsamphm1c]

People are giving derivatives too much blame. The notional number is not meaningless, but is also not the least bit scary. People freak when they see it. There is no reason to freak. A quadrillion here, a quadrillion there, no big deal.

[tompoe]

Personally, I see a scenario that has downsizing happening instantly. Simply reinstate the laws that protected us up until 2000, and life will be good.

[Baltotoast]

Who, exactly, will life be good for? What exactly will breaking up the banks accomplish now?

[Aaror]

It will remove the inappropriate consolidations and reduce the self dealing deals and regulatory workarounds that allowed stupid deals to be set up.
It isn't closing the barn doors after all the horses got out, it is closing the barn doors after half the horses escaped...