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 was obvious a year ago, when the shot gun bank mergers were announced, the Post reported that JPMorgan Chase and Bank of America, and Well 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 huge financial institutions are based outside the U.S., still holds.