With Top 4 US Banks Holding $217 Trillion In Derivatives, Total Number Of US Banks Drops To Record Low

Tyler Durden's picture

Overnight, the WSJ reported a financial factoid well-known to regular readers: namely that as a result of a broken system that ever since the LTCM bailout has encouraged banks to become take on so much risk they become systematically important (as in their failure would "end capitalism as we know it"), and thus Too Big To Fail, there has been an unprecedented roll-up of existing financial institutions especially among the top, while the smaller, less "relevant", if far more prudent banks have been forced out of business. "The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. More than 10,000 banks left the industry during that period as a result of mergers, consolidations or failures, FDIC data show. About 17% of the banks collapsed."

The resulting elimination of over 10,000 banks in the past thee decades is shown in the WSJ chart below, which also shows total amounts of bank deposits.

The WSJ comments as follows:

The consolidation could help alleviate concerns that the abundance of U.S. banks leads to difficulties in oversight or a less-efficient financial system. Meanwhile, overall bank deposits and assets have grown, despite the drop in institutions.

Well, first of all, as David Kemper, chief executive of Commerce Bancshares Inc., a regional bank based in Missouri, said "Seven thousand is still an awful lot of banks," particularly in an era where brick-and-mortar branches are becoming less profitable, said "There's no reason why we need that many banks, especially if those smaller banks have a much lower return on capital. The small banks' bread and butter is just not there anymore."

But more important is the erroneous observation about deposits, which indicates a persistent lack of understanding about how QE works. As we won't tire of explaining, the ~$2.2 trillion surge in deposits since Lehman is matched only by the ~$2.2 trillion surge in Fed created reserves. In other words, excess reserves appear on bank balance sheet as excess deposits, which are then used by banks to gamble away a la the London Whale, which used nearly half a trillion in fungible reserves (as manifested the liability side of its ledger) to fail in cornering the IG9 market. This transformation is shown on the chart below (discussed in depth here).

The point here is that the number of banks is largely irrelevant: it is obvious that the big will keep on getting bigger, and the Big 5 banks will do all in their power to either acquire their profitable competition or put everyone else out of business. However, the far bigger question is what happens to bank deposits once the Fed start to taper, ends QE or outright unwinds its balance sheet, which ultimately would soak up trillions from bank deposits. Because if there is one thing that is clear is that without the Fed, and without commercial bank loan creation (which has been non-existent in the past 5 years), bank balance sheet would be exactly where they were the day Lehman died.

Finally, one does not need to go any further than the following chart from the OCC showing total bank derivative holdings for all US banks and just the Top 4. The punchline: just the 4 biggest US banks hold $217.5 trillion, or 93% of the total $233.9 trillion in derivatives.

In light of the above, who cares how many other banks in the US exist?

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NoDebt's picture

Power concentrating at the top- the defining characteristic of our times.  It's everywhere, in all things.

BaBaBouy's picture

In An Unrelated Development...

A small but growing movement by Jewish activists demanding the right to pray at the site of their destroyed temple, in the heart of this disputed capital’s Old City, is creating a potentially explosive clash with the Muslim world, which considers the spot holy and bans Jews from public worship there.

Each week, hundreds of Jews ascend the creaky wooden ramp built above the Western Wall and enter what is often called the most contested real estate on Earth. Many then embark upon a game of hide-and-seek with their police escorts — whispering forbidden prayers while pretending to talk into cellphones, and getting in quick but banned bows by dropping coins and then bending to pick them up.

Born Patriot's picture

This is a natural advancement for a frist world country. As we introduce better regulations and enforce best practise industry standards, it becomes more challenging to start or run a company in the industry. Over time, only the best companies that are able to comply with sophisticated industry legislation survive. Larger more professional corporations are better at complying regulations such as consumer protection laws and financial audits, and so over time we end up with fewer, better companies. And this is ultimately what consumers want: a few good choices, not hundreds of mediocre and bad choices.

Toolshed's picture

Ok, what's with this troll explosion? Born Pat(sy)riot is either MDB re-incarnated, or a clone of MDB. I think it is MDB personally. I mean, he must have an abundance of time on his hands since his absurd pure bullshit news website went over like a tungsten cored balloon. Plus this spew is soooooooo classic MDB, it must be him or one of his prodigys. I guess we do need some light hearted entertainment in these dark times. So, carry on troll master!!

PT's picture

Next time I feel the need to vomit, I'll come looking for him.
I'd rather not though. 

SWRichmond's picture

Derivatives are where the true leverage in the system lies.  it is arguably the most important market there is.  the need to support the leverage in the derivative system, the very leverage which is supporting the rest of the system, is the reason bankruptcy laws were changed in 2005 to put derivative holders first in line

superflex's picture

Paid .gov trolls. 

Plain and simple.

El Vaquero's picture

Take it from somebody who has gone round and round with a major bank in court, the large banks do not do a very good job of following consumer protection laws and their records suck balls.

kaiserhoff's picture

True Dat.

  Sometimes all you have to do is ask them to produce the note.

  Hilarity ensues.

Headbanger's picture

Yes and makes for a greater implosion cause there's so much more concentration of risk in banks now.

This will not end well at all!

BandGap's picture


Thirty years ago were these banks or investment houses? Was Gold Mansacks a commercial bank back in the day? Or an investment bank?

We let the industry redefine itself in order to screw John Q. Public.

We gave these fuckers the keys.

666's picture

Derivatives belong in calculus, not in banks.

doctor10's picture

A sad reflection of the absence of small buisness in "flyover country"

kaiserhoff's picture

True to some extent.

  The bigger problem is that with ZIRP banks have no legitimate functions left.

Canadian Dirtlump's picture

"power concentrating at the top"


Precisely correct. In truly orwellian doublespeak fashion, "regulations" does not mean regulations. Itt means make the business environment inordinately difficult for all relevant businesses who aren't part of the anointed insider's club - with the aim to put them out of business. Just like the farm bill sees money go to mega farms, congressmen with large parcels of land, and actors and famous musicians - not to the shrinking number of small family farms.


As days go by the concept that there is some end game which involves a small ruling class with only enough serfs to do their bidding seems more and more reasonable, and less and less like some wild spun conspiracy.

krispkritter's picture

Overheard: 'Rewarding banksters with bonuses is like giving Bin Laden Frequent Flyer Miles for 9/11...'  

Jumbotron's picture

Well....cool.  There are less banks to save in the inevitable next leg down in the continuing collapse.  Problem is the price tag for each of the remaining banks to be bailed out again just went through the roof.

yogibear's picture

Many incentives for banks to be dishonest and get bailed out/taken over. Bank officials can run banks into bankruptcy, cook the books and divert reserves to off-shore personal accounts. 

Nobody goes to jail in this environment.

Dr. Engali's picture

"Seven thousand is still an awful lot of banks," "There's no reason why we need that many banks,"


Yes we do you facist pig.banks like the morgue are not going to wast any effort loaning to mom and pop shops. If the loan isn't several million dollars then they lose insentive to make it. More banks decreases the amount of power and control the facists like you and Dimon have over the sheep you fuck.

NoDebt's picture

We should have started by breaking up the 5 largest banks in the US.  And how hard would that have been to do vs. setting up this elaborate appartus to allow TBTF banks to continue to exist (but, of course, never harm anybody again)?

Obviously, it's too late to do that now.  The minute the concept of "Systemically Important" entered the law and regulatory language, it was all over.  They won.

El Vaquero's picture

We should start by phasing out fractional reserve banking.  Give control over the money supply to private banks, and they'll be running things eventually.  Well, we've given that control over that money supply to private banks, and they're running an awful lot of things now. 

RSloane's picture

Politicians reward big banks because they rely on them for hefty campaign contributions. Big banks do not tolerate competition that politicians cannot directly control.  Its the perfect knot of fascism.

Duke of Earl's picture

The simple arrogance of the statement that someone knows how many banks there *should* be is appalling.

BandGap's picture

Is that "over the sheep you fuck"? Or, "over the sheep, you fuck"?

Because it matters.

Rich V's picture

"as in their failure would "end capitalism as we know it"

I once thought that would be a bad thing, now ending the "capitalism" we have is a prerequisite to getting out of this mess.

RSloane's picture

I can't think of any capitalistic societies that exist today. Can you?

Duke of Earl's picture

Depends on how purely you define capitalist.  Eg. there is always some point where a government (unless you are anarchist) would regulate or own business, such as gas lines or water supply.

Pick your line to draw and perhaps we can think of a society. :)

artless's picture

PLease explain why gas lines, or water for that matter are soooo special or soooo unique that private companies cannot provide for them ?

It's okay, I'll wait.

Capitalism is capitalism. There are no degrees. Kinda like one cannot be kinda pregnant. You either are or you aren't.

And we (meaning the Good Ole USA) are not. Haven't been in many, many decades. There is thing thing called The Fed. Look it up. Makes the US a crypto socialist-fascist economy. Period. End of Story.

And yes I am an anarchist but that is a political system. Capitalism is an economic system. Communism in its pure form is anarchist. Problem is ATMO (according to my opinion) it goes against the nature of man and thus is doomed to failure. Therefore I am a capitalist.

And what we got here ain't capitalism.

rosiescenario's picture

"as in their failure would end fascism as we know it"

RaceToTheBottom's picture

The FED and Bankster apologists plying their trade....

PT's picture

Thanks for that.

For every expert, there is an equal and opposite expert.

The one that wants to look after your wallet for safe keeping is the liar. 

venturen's picture

Can hardle wait for JPM & Goldman's Citi Bank of America...the ONE and only bank. One stop shoping for your food stamps, living allowance and voting directions. No more need of elected leaders or bureaucrats....a board of nameless overloads will make the decisions....wait...we already have this   

Rainman's picture

" Derivative contracts remain concentrated in interest rate products, 81% of total derivative notional amounts "....per OCC

That's why Mr. Yellen must defend the 10y to infinity and beyond.

buzzsaw99's picture

The consolidation could help alleviate concerns that the abundance of U.S. banks leads to difficulties in oversight or a less-efficient financial system...

the wsj has officially jumped the shark. that is the single most hideously disingenuous statement I have ever read.

PT's picture

Translation:  "Competition is good for you but bad for me."

The capitalist equivalent of "Some animals are more equal than others." 

GrinandBearit's picture

The bankster games will never end until these leeches are forcibly taken out.

Same goes for politicians and the US government.

El Vaquero's picture

Every time I see the OCC's quarterly derivatives report, I think to myself "Bankers are fucking insane."  People have been murdered for the contents of a cash register at 7-11, and they have produced a notional amount of hundreds of trillions in derivatives, then the OCC has the gall to claim that the net exposure is only something like 2 or 4 trillion because, if SHTF, bank A may owe tens of trillions, but it will also be owed tens of trillions.  Well, shit, what happens when one of the counter parties goes out of business?  Hmmmm OCC?  Fuck you OCC. 


Fuck this, I'm going to drink some more coffee, then I'm going to go put the newly rebuilt transfer case back in my Jeep so that I may take it elk hunting on Friday to get something tangible:  Food.  Fuck banking, fuck derivatives, and a big fuck you Bernanke. 

Cthonic's picture

If you glance through the OCC circulars for the past decade, you can see they've never understood or properly regulated derivatives risk.  Part of it may be ignorance, I think more than a little part of it is regulatory capture.

There used to be an age when every bank published its financials in the local paper such that potential depositors could get an idea of the viability of an institution, and there wasn't a whole lot of balance sheet engineering that could be undertaken to fudge the numbers that wouldn't have been considered a fraud upon the public.  Now, good luck getting at anything other than bank holding company financials, chock full of opaque derivatives exposure and off balance sheet gimmicks.

Yes We Can. But Lets Not.'s picture

Time here to pool some assets, start our own bank, ZeroBank. Gold friendly. TBTF unfriendly. Kinda place, you walk in the door, an RT-type babe greets you with 'welcome bitchez'. Ample parking for boat trailers. No surveillance cams, and none needed after the publicity surrounding that initial epic-fail robbery attempt. Motto - Zero interest, zero bullshit.

Yes We Can. But Lets Not.'s picture

Which reminds me of a true story.  Late 1980s.  I am a few months into a brief stint with a consumer finance company, where I learned all I needed to know about usury.  What a miserable job, helping people get absolutely hosed so they can buy shit they don't need and can't afford.  Anyway, the psychopath manager is too cheap to hire Brinks to make the daily deposit, consisting of cash an check loan payments made by clients who have financed purchase of motorcycles, appliances and the like.  So he has me making the daily deposit during my lunch break.  One of several reasons I hated that gig.  One day, I'm at the bank with a blue pouch with like $600 cash and $20k in checks.  The two glassed-in commercial biz booths are occupied, so I wait at a forms table, set down the bag on table, and lean over it reading the sports page.  I look up and notice a guy walking my way from the line of 10 or so folks waiting for a retail teller.  He turns around, goes back to line, and I go back to the baseball boxscores.  Next thing I know, he has the blue pouch and is racing for the door.  A customer from the retail line races after him.  So I figure I should give chase too.  Young and stupid.  So we get outside, the perp is heading for a waiting car sitting there with the passenger side door open.  Suddenly, the chasing customer, who I am right behind, pulls up and fires off two shots from a handgun at the perp as perp dives into the car, which races off over some bushes and onto the road.  Customer and I stand there a moment, me in shock, and then he runs to his car and splits.  Next thing you know, the bank's security staff, who turns out were having like their monthly meeting directly overhead from where shots were fired, come racing out, and I have to explain what happened to them and then to LE.  The two perps had robbed another bank nearby that day. Don't know if perps or any passersby took a bullet.  So I get back to work and the asshole boss is pissed at me for not being Brinks.  I tell him to eff off and I go find a new gig....

monkeydart's picture

I'm not trying to say the banks aren't corrupt or anything but I feel like the "233 trillion dollars in derivatives" statement on its own doesn't mean that much. If there are losers there are also going to be winners and the banks usually take both sides and just try to make a spread. With the ~$35 trillion (based on the chart) in option derivatives the banks are going to be writing both calls and puts and also buying back those same options at a lower price. With the ~$135 trillion in swaps the banks are going to be working with other companies on all sides and locking in some basis points. And as for futures and forwards, the banks are again going to be making a very easily visible spread with almost no risk. 

The problems arise when these banks are uneven in their risk allocation and might have written $1 trillion worth of puts and $1 trillion worth of calls. If nothing happens it an easy $2 trillion. If the market crashes and they don't have the proper hedges, those puts now have to bought back for $5 trillion and that gets tough. 

So am I missing something or does the 233 trillion in derivatives not mean that much on its own? I think it would be very interesting to see how much exposure the banks have to each type of derivative and how their financial positions might change with big moves (up or down) in the market. Basically how much of the 233 trillion in derivatives is unhedged?

El Vaquero's picture

Like I said above, what happens when one of the counter parties goes out of business?  The answer to that in 2008 was TARP and trillions being printed by the FED.  Think we can withstand another round of that shit?  I don't. 

tarsubil's picture

The way I think about it, though it may be wrong, is that if the banks have hedged everything and balanced every derivative (116.5 trillion of puts and 116.5 tillion of calls), if something is incorrectly valued like MBSs, if one side is off by 10%, that means they'll need 11.7 trillion in bailouts to not go tits up when reality hits. That's why they print 85 bil a month from past muff ups of derivatives and that is why they most likely will have to increase the printing month to month to save the banks in the future because fraud is systemic in the banks and the derivatives are assuredly not balanced or valued correctly.

yogibear's picture

Any Fed funds used as reserves at banks should be swiped by member banksters.  The Federal Reserve will never publically announce fraud by member banksters. The fed will just print more. 

More reason for honest banks to turn dishonest. There is no honor among criminals.

Does William Dudley's speech about some member banksters being dishonest really think it will accomplish anything?

Yes We Can. But Lets Not.'s picture

I would think the huge derivative figure means more future fiat printing and currency debasement when things inevitably eventually blow up

Dewey Cheatum Howe's picture

Isn't this scenario exactly what the Sherman Anti-Trust act is for in the first place? Seems to me the politicians been bought off if it isn't enforced because TBTF should never happen let alone allowed to persist if the law was enforced....


Rainman's picture

Usury laws coincidentally went into the shitcan too.

El Vaquero's picture

Yes, and at the heart of a bunch of this shit is Citi.  They lobbied the hell out of South Dakota to include credit card agreements in the legal definition of written agreements (there is no cap on interest in written contracts in SD) so that they could legally export their home state's (Citibank NA is incorporated in SD) interest all over the nation.  They pulled the merger with Travelers in the '90s in violation of the Glass Stegal act, which pushed congress to repeal Glass Stegal. 

RiverRoad's picture

Many of the smaller banks now closed were formed and chartered for the express purpose of being bought out at a profit by the larger banks.  They deserve to be gone.