Felix Salmon

Chart of the day: Risk and size in banking

By Felix Salmon
June 12, 2009

Mike at Rortybomb creates this chart from the official stress-test results:


Says Mike:

There was an argument from the big-is-better crowd that larger banks may have more losses net, but as a percent of total assets it will be smaller…

This chart should feel like someone just kicked you in the stomach. The biggest banks, using their own models they chose to report to the Fed, did terrible compared to a basket of small banks.

My own more-or-less arbitrary cut-off point is $300 billion: I don’t think that any bank should be allowed to have more than $300 billion in assets. And it turns out, using the official stress-test numbers, that the 12 banks with less than $300 billion in assets have a gross estimated loss of $127 billion, or 7.6% of assets. Meanwhile, the four banks with more than $1 trillion in assets have a gross estimated loss of $425 billion, which is 8.4% of their asset base.

And as Mike’s run-your-own-stress-test spreadsheet shows, the worse the macroeconomic situation gets, the bigger the gap between the biggest banks’ losses and everybody else’s — even when expressed as a percentage of total assets. Sooner rather than later, it would be great if we could start dismembering Citi, BofA, JP Morgan Chase, and Wells Fargo, so that none of them is remotely as big as they are right now.

2 comments so far | RSS Comments RSS

Maybe we can sell half of Citigroup to Fiat.


I wonder if this chart masks the more aggressive strategies of the larger banks. They were the ones who so vigorously pursued M&A and consolidations. These have still not been properly digested. Their higher losses % may be an indicator of that. It could also be just that larger banks have more difficulty determining and addressing their exposure.

However, remember that most of the officially collapsed banks were small and regional operations. Large banks have the capability to better absorb large losses as a percentage of their portfolio than smaller banks. More assets = more leverage = more financing possibilities.

Posted by greg | Report as abusive

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