Too Bigger To Fail? St. Louis Fed Warns Over Concentration Of Risk In Ever Growing, Ever Fewer "Big Banks"

Tyler Durden's picture

One of the numerous adverse side-effects of the horrendous policy decision to start bailing out each and every risky bank, and thus allowing no more risk in any investment (for the time being), has been the very simple observation that massively mispriced risk has gotten concentrated to an unparalleled degree among very few players. The population of Big Banks has been massively trimmed (Goldman thanks everyone for allowing them to have massive Fixed Income bid/ask spreads) and now a mere five banks account for the bulk of loans, deposits, and derivative exposure. When the economy is faced with another Lehman event at some point in the future, when bailing one of the Big 5 is no longer feasible, the delayed consequences which have so far been successfully swept under the rug, will come back in time and bury any positive legacy that the Man Of The Year may have created. One indication that this time may be sooner than most think comes out of the St. Louis Fed itself, which has released a paper titled "The evolving size distribution of banks" in which it highlights the expected: big banks are getting bigger, and are holding a record share of all rosky assets. When the asset repricing moment occurs, absent an apriori renewal of Glass-Stagall, look for the inevitable moment of complete House Of Cards collapse.

Key points from the St. Louis Fed:

Fundamental issues about bank size and the systemic risk implications of so-called too-big-to fail policies are heated topics of discussion for researchers, policymakers, and the press alike. However, significant changes in size distribution of banks have been occurring since at least the 1980s and 1990s, when the structure of the banking industry began to evolve following regulatory changes such as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

To document the changes in the size To document the changes in the size distribution of banks, we study total assets of commercial banks using the public Call Reports for three selected dates: 1987:Q2, 1998:Q2, and 2009:Q2.2 During these 22 years the number of banks fell from 15,168 to 10,169 and then to 7,744 after progressive concentration of the industry and bank failures, particularly during the Savings and Loan Crisis of the late 1980s and early 1990s and the current financial crisis.

Many key facts can be noticed using this chart. First, the total number of banks in the United States has substantially decreased, although the number is still considered large by international standards. Second, over time the increase in the number of relatively larger banks stretched the tail of the distribution to the right, a common measure of the asymmetry of a distribution around its mean—the skewness of the  distribution— increased from 0.92 in 1987 to 0.95 in 2009. Third, the largest banks own an even larger share of total assets, making the right tail of the distribution even thicker, a measure of the thickness of a distribution tail—the kurtosis—has increased from 5.4 in 1987 to 6.7 in 2009. If we dropped the largest 50 banks, the kurtosis would increase by much less and the skewness would fall instead of increasing.

Hence, the flattening of the bank size distribution is part of a long-term trend and may have led to a more concentrated industry with larger average-size and big banks independently of the recent financial crisis and the concurrent policy interventions. The current debate on too big to fail is important because it clarifies the tension between profitability, propensity to take risk, economies of scale, and economies of diversification on the one hand, and the competitive and systemic risks imposed by fewer larger yet more complex players on the other hand. However, if limiting the size of large banks were considered appropriate to reduce systemic risk, it would be a clear change of direction relative to the long-term evolution of the industry.

When the St. Louis Fed is telling its master it is time to take appropriate measure to mitigate TBTF risk, politicians better listen. And yes, even though Wall Street indulgences are sure to dry up overnight if some form of Glass-Steagall is to be put in place, this law, and particularly the immediate repeal of Gramm-Leach-Bliley are critical in advance of the next major risk flaring episode. Granted such an episode will likely never come as long as the Fed keeps pumping trillions of excess liquidity into the economy (or more specifically into bales of cash held in bank basements where it sits useless, collecting 0.25%), there is a technical limit on how much longer this reckless behaviour can persist, and it comes roughly in line with the dollar hitting a value of zero. Courtesy of Bernanke, we are already well on our way there.


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Anonymous's picture

This simplistic analysis skews things towards the upside by a large scale; many of the contracts cancel each other out. The thesis is still the same though, they probably are too large.

The term "notional value" implies that this amount (generally) does not change hands. If a 500mm contract A and 500mm contract B are entered between the two respective parties, the notional value is 1000mm, but that does not necessarily indicate the amount of money that will change hands, which could be 0.

More conservative institutions use derivatives for risk hedging and to match cash inflows with cash outflows - they do serve a place, to transfer risk.

The key is narrow their scope somehow ...

omi's picture

Taxpayer is happy to be on the receiving side.

drbill's picture

Is the Fed TBTF? Whoa, I'm making myself dizzy!

Bear's picture

Is TBTF TBT Succeed?

MarketTruth's picture

>>>Didn't they get the memo?<<<

i think someone forgot to put the new TPS cover sheet on it ;-)

Reggie Middleton's picture

Oh, I forgot "Any objective review shows that the big banks are simply too big for the safety of this country"

This is basically an issue of regulatory capture. I just posted somthing on ZH regarding the issue. The government has been captured by the banking special interests and the livlihood of the populace has, and will come 2nd to the best interests of the concentrated lobby - that is until the resultant (and inevitabe explosion takes enough wealth and capital out to usher in a new regime of concentrated lobby).

Commercial real estate is a perfect example. By regulators allowing "extend and pretend" to occur in the banking industry, the requisite asset value writedowns that need to occur to bring smart, educated money into the real estate market have not occured. The longer you wait to take the writedowns, the larger the writedowns will be.

Regulatory capture in the banking industry is actually suppressing pricing in the commercial (and residential, may I add) real estate industries - and as a result is creating an even more increased incentive for additional capture by artificially prolonging the suppression of the asset values that called for the capture in the first place.

A reflexive, circular, death spiral of I'll rub your back if you put money on mine.

A Man without Qualities's picture

At this point, it is easier to imagine there is just one bank, which stretches from the Treasury to the Fed to JPM, GS, Citi etc.  It is acting in a concerted fashion, but by transferring the toxic assets from the banks to the Fed and from the Treasury to the banks, with the Fed creating FRNs to plug any gap, there is an illusion that it is a financial system, whereas it has become nothing more than a game of pass the parcel.

Given we have a situation were big banks never fail, because the government won't let them and Treasury auctions won't fail because the primary dealers will always buy using free money from the Fed, the question has to be, were is the breaking point?  It must be the Dollar, surely?


Bear's picture

In Feb of 2008, primary dealers stopped supporting Auction Rate Securities and in an instant they were gone. I think it will be a temporary problem with only one dealer that will bring the house of cards down. What this looks like I don't know. It could also be caused by an external event like Syria/Iran (Hezbollah) attacking Israel. The USD seems to be more easily controllable.


Anonymous's picture

You meant Israel attacking Iran.

orca's picture

Big banks can't fail, period, because they are big. The fun part starts when they get smaller, of in FED speak when they grow negatively. It's not semantics but please don't ask me to explain, this was just a powerfull flash of insight brought to you by your European friend.

bugs_'s picture

JPM > The Entire World baby!!

chet's picture

Some of the regional Fed banks are waking up.  But they need to start winning votes at the meetings.  Do the Chairman and NY Fed have veto power?  Probably implicit veto power.

BG_rulez's picture

If there is fiat monetary system there is room for abuse, deficits, inflation, fractional reserve lending…

Help dismantle the abomination of today`s governments and gain our freedom back!

Selah's picture

Freedom isn't gained so easily.

History has proven that freedom has a price... blood.

BG_rulez's picture

Not so true. There are many other ways to oppose the system such as:

  1. Avoid the Gmen in general and taxation in particular.
  2. Do not paricipate in the "money creation cycle" (avoid banks and the financial institutions)
  3. Stay off debt and into hard assets
  4. Start growing food if possible
  5. Educate yourself and avoid sedation(entertainment of all kind).
  6. Last but not least - light the truth out and be compassionate with others.
Anonymous's picture

The risk lies entirely in your hands, oh little ones.

Play our game by the rules we fluidly deploy or sit and lose either way; we guarantee it.

We own your ass :)

40muleteam borax

BG_rulez's picture

2 Kings (16:17)

“Don`t be afraid” the prophet answered. “those who are with us are more than those that are with them. “

And Elisha prayed, “O LORD, I pray thee, open his eyes, that he may see. And the LORD opened the eyes of the young man; and he saw: and, behold, the mountain [was] full of horses and chariots of fire round about Elisha.

Anonymous's picture

Squeeze The People –

Squeeze the People is the most sincere act of patriotism I can offer to my fellow neighbor. It is an album of Freedom Music of the People who are being squeezed to death by Fat Cat Wall Street banksters. Its purpose is to encourage alternative perspective and hopefully a greater sense of things. I invite you to listen. And please know that I am grateful for your time, because time is the most valuable commodity we have to share.

merehuman's picture

Much discussion on the finances, the banks and lies that glue it all together.

Not much said about many millions having idle hands and little to no income.

Rural and isolated areas like mine  dont expect much trouble.

Cities crowded with an unemployed population and in time of inflating food prices are a  bomb waiting to explode. I would like to think we would all help one another, but todays collage of people are used to instant everything on demand. There  is little patience or humility in todays crowd of man.

How fast we wake up might depend on how many switch from tv to utube!

Without utube i would still be asleep to the nation/world crisis . Because of utube i learned about 1913, cfr, that the fed is private contractor, silver and gold suppression and much more. My utube education led me to zerohedge.

I have seen no site more note worthy than zerohedge and hereby thank its founders and writers, repliers included. I have learned much here, allowing me to intelligently carry on the prevailing  news to my fellow man.

Damn you guys are good . THANKS!!

BG_rulez's picture

Breathe the free air again!


"Cities crowded with an unemployed population and in time of inflating food prices are a  bomb waiting to explode."

If the bomb really explodes no one is safe!