The financial crisis introduced the idea of banks that are not only too big to fail but, in some ways, too big to save. When their assets become multiples of the gross domestic product of even an advanced country, and when guaranteeing their liabilities threatens to bankrupt the nation, there is a legitimate political debate about the size of banks.
Politicians and regulators are busy talking about capital levels, liquidity, pay, securitisation and cross-border supervision but the question of size may challenge them the most. US Treasury secretary Tim Geithner has proposed a sliding scale of capital required as banks get bigger.
Unless this is tackled it may come back to haunt the next generation of regulators. This year's Top 1000 ranking of world banks shows that big banks are getting bigger and dominate the global banking scene more than ever. The consolidation provoked by the crisis has made the banking world ever more skewed.
JPMorgan is now the world's largest bank by Tier 1 capital after scooping up Bear Stearns and Washington Mutual. Its capital went up by 53%. Bank of America, with its Merrill Lynch-related digestion problems, goes up from fifth to second with a 45% increase in capital. Following the takeover of Wachovia, Wells Fargo shoots up the table from 23rd to sixth position and its Tier 1 went up 136%.
The Top 25 banks now account for 40% of the total Tier 1 of the Top 1000 and 45% of assets. Of course, in this most devastating of years this also means they account for $32.37bn of losses, playing a leading role in the collapse in profits of the Top 1000 banks by 85.3%. In the area of highest profits, Chinese and Spanish banks dominate with ICBC, China Construction Bank and Santander in the top three positions.
BRIC lacks muscle
But in banking, the BRIC (Brazil, Russia, India, China) revolution in terms of increasing economic muscle has yet to translate into banking dominance with all its regulatory challenges.
In the Top 25 by Tier 1 table - the key Top 1000 measure - there are six US banks, 12 Europeans, four Chinese and three Japanese. Even the largest Chinese bank, ICBC, in eighth position, is only just over half the size of JPMorgan. Only further down the list do we find the top Brazilian, Russian and Indian banks: Itaú Unibanco at 33, Sberbank at 38 and State Bank of India at 64.
What this means for global banking is that unless the major international banks downsize of their own accord in the next few years, global bank's top-heavy structure will continue. As we have learned to our cost, this is all well and good when markets are moving up, providing economies of scale and global reach. But regulators should be thinking now about the implications for safety.
