Are big banks getting bigger? While some assert the answer is, “yes,” the facts are a bit more complicated and should be closely considered. In this post, we take a deeper dive into the facts on size and concentration in the banking industry. The facts reveal a picture of bank size and concentration that is both more interesting and more nuanced than the general claim that “big banks are getting bigger.”
The key takeaway is that large banks actually account for a smaller share of financial sector assets than they did a decade ago and the degree of concentration in the banking sector is not unusual relative to other important industries in the US.
Overall, the entire banking sector is growing. As seen in Figure 1, real assets in the banking industry have more than doubled from $9.1 trillion in 2000 to $18.8 trillion in 2018. The overall growth in the banking sector is a sign of the health and vitality of the U.S. economy: As the economy grows, so too do banks as they steward an increasing amount of savings.
While Forum member assets have grown steadily along with the rest of the banking sector, the share of total banking sector assets accounted for by Forum members displays a more complex pattern. Specifically, Table 1 shows that Forum members’ share of total banking sector assets reached a peak of roughly 62% in 2008 and has declined steadily over the past decade to 54% in 2018.
This observed decline in the relative size of Forum members is not unrelated to the regulatory environment of the past 10 years. Since 2008, regulators have substantially increased the regulation of large banks through enhanced requirements for capital, stress testing, liquidity, and other regulations that apply to large banks with total assets in excess of $50 billion. As a result, smaller banks have had a much greater incentive to grow their asset base – both organically and through mergers and acquisitions – than large banks. In fact, recent research from the Federal Reserve has shown that much of the growth in the banking sector since 2009 has come from those smaller banks that are below the large bank threshold of $50 billion where many new regulations become effective.
The analysis presented in Figure 1 and Table 1 speaks to the collective share of Forum member assets relative to the universe of bank holding companies. While this is an important comparison group, it is also important to recognize the role that non-banks play in the financial system. Importantly, in the past 20 years, non-banks have begun to play a larger role in the financial system by offering products and services that were, at one time, largely offered only by banks. As an example, a large fraction of home mortgages is now made by non-bank financial institutions. In particular, in 2017 more than half of all home mortgages were made by nonbanks as opposed to 9% in 2009. Accordingly, when gauging the relative size of large banks, it is also important to consider their size relative to the entire financial system.
Figure 2 shows Forum members’ share of total financial industry assets from 2000 to 2018. As in Figure 2, this chart shows that the Forum member share of total financial assets has declined steadily since 2010 from a peak of roughly 14 percent to 11 percent in 2018. As a result, Forum members comprise a much smaller fraction of total financial system assets than banking sector assets and their relative size within the overall financial system has declined steadily over the past decade.
Discussions of large bank size often naturally lead to a discussion of industry concentration. Another common sentiment is that the banking sector is “too concentrated” and that the degree of concentration in the banking sector is “exceptional.” This sentiment, however, is hard to square with the facts on industry concentration across a wide array of U.S. industries. Figure 3 shows the fraction of industry revenue accounted for by the largest four companies across an array of U.S. industries. The top four commercial banks account for roughly one-fourth of all commercial banking revenue. At the same time, other industries such as wireless telecommunications, aircraft manufacturing, and automobile manufacturing display significantly higher levels of concentration. Indeed, across the 885 industries that are measured with the same degree of aggregation and included in the industry survey, commercial banking is less concentrated than 532, or 60 percent, of all surveyed industries. Accordingly, commercial banking is actually less concentrated than most other U.S. industries.
Large banks have gotten larger as the entire banking and financial system has expanded along with the economy. This is a positive development that reflects underlying economic growth and should not be reflexively viewed as problematic. As a share of total assets, Forum members have reduced their footprint substantially since 2008. This is true both as a share of total banking sector assets and total financial system assets and represents, at least in part, a response to the enhanced regulatory environment for large banks. As a result, Forum members have grown more slowly than the rest of the financial system over the past decade. In addition, commercial banking as an industry is less concentrated than many other significant and important industries and the degree of concentration in the banking sector is not exceptional among U.S. industries.
The analysis presented above is useful for answering the question – how large and concentrated are large banks? It does not, however, answer the question – how large should large banks be? The former question is essentially a data exercise and the latter question is a considerably more fundamental (and interesting) economic question that data alone cannot answer. While bank size and concentration may pose some risks that need to be managed, it is also the case that large banks, like large retailers (e.g., Walmart), large technology companies (e.g., Apple), and large car companies (e.g. General Motors) offer substantial benefits to households, businesses and communities that should not be overlooked. As we have discussed in previous blog posts, large banks offer important economies of scale, economies of scope and are better diversified than smaller banks. All of these size-related benefits should be seriously considered in any discussion of the “right” size for large banks.