Monday, January 17, 2011

Big Banks Increase Market Share

The top five U.S. commercial and investment banks now represent 13.3% of all U.S. financial firms’ assets, up from 11.8% three years earlier, when the financial crisis hit, writes Mark Whitehouse in Real Time Economics .

Size can be good, especially when allowing for political leverage.

“Banks can use a lot of debt – as opposed to equity, or capital – in large part because it allows them to play heads-I-win-tails-you-lose game with taxpayers. In good times, leverage boosts returns for banks’ shareholders. In bad times, it makes a bank’s failure so potentially destructive that taxpayers have no choice but to bail it out. The bigger and more levered the bank, the more urgent the bailout.

It comes as little surprise that banks have been pushing to keep capital requirements low, despite an increasing number of economic papers suggesting that capital requirements as high as 50% would be a net benefit for the economy.”

A lesson especially relevant for Europe and European banks too.

No comments: