There’s been an ongoing debate since the 2007-8 financial crisis about whether the biggest banks are now too complex to manage, exposing tax payers to more bailouts.
The chief economist of the Bank of England Andrew Haldane has offered some interesting data on bank complexity. He shows how it has even increased since the crisis. Referring to banks that are so big they are officially called systematically important financial institutions or SIFIs, he notes that:
“In 2006, the average SIFI had a balance sheet of $1.35 trillion – roughly the same as the annual GDP of a small G7 country. The largest SIFI had a balance sheet totaling $3.0 trillion. This is many multiplies of the largest non-financial firm. It also only covers on-balance sheet positions. Turning to off balance sheet positions, the derivatives portfolio of an average SIFI totaled $19 trillion in notional terms in 2006. For the largest SIFI, it was $60 trillion. This, too, is many multiples of the largest non-financial firm’s position.
These massive SIFI balance sheets were, in turn, spread across a very large array of distinct legal entities within each group. In 2006, the average SIFI had around 328 legal entities within the group. The largest had almost 900 distinct legal entities. Most of the largest global SIFIs had numbers of legal entities running to four figures. By comparison, the world’s largest non-financial firms had less than half this number of legal affiliates.
A final complexity metric is the proportion of so-called trading assets. This is a diagnostic on the diversity of a bank’s business model – whether it is engaged in investment as well as commercial banking… The average SIFI had a trading book of around a quarter of assets in 2006. For the largest, this was closer to around 50% of assets.
Since the crisis, there is little evidence of these complexities having reversed…The balance sheet of the average SIFI has not shrunk. In fact, it had risen to around $1.8 trillion by end-2013. For the largest SIFI, it was around $4.0 trillion. The pattern is even more striking off balance sheet. For the average SIFI, the derivatives book has risen by over 50% to over $30 trillion by 2013. For the largest, it had risen to $75 trillion.
On the other complexity metrics, the number of legal entities for the average SIFIs is essentially unchanged comparing 2006 and 2013. And despite a significant rise in risk weights, there had been only a modest slimming of SIFI trading books by 2013, with the average share of assets going from 22% to 19%. ”
Tomas Saraceno