The big banks in the United States are growing bigger at a pace that few people realize. Simon Johnson, the MIT economist, estimates that the six biggest banks in the United States had combined assets equal to 17% of GDP in 1995. These days that number has expanded to 63% of GDP.
Despite what you may think, the financial crisis has actually helped this growth. At the end of 2007, according to Rolfe Winkler of Reuters, the Big Four banks—Citigroup, JPMorgan Chase, Bank of America and Wells Fargo—held 32% of deposits. By the middle of 2009, the figure had swelled to 39%.
So is this a bad thing? While many U.S. commentators worry that the expansion of the big banks will inevitably lead to giant financial institutions exerting control over the political system to get whatever they want, it’s not clear that will be the case.
In Canada, the Big Five banks enjoy an even more dominant market share than the Big Six in the United States, but the government has not caved in to them. In the late ‘90s, Ottawa rejected the banks’ attempts to merge. More recently, it has been zealous about forcing them to raise capital levels.
Is this some peculiarly Canadian turn of events? Maybe not. Think about the competitive logic of a country with a financial marketplace dominated by several lookalike big banks.
So long as those banks are similar in size and similar in scope, no single bank will be able to outbid the others for government favors. And while all the banks may prod the central government for policies that are good for banks in general, each of the banks will realize that it has no particular competitive advantage that will enable it to capitalize on that policy to a greater degree than its rivals. So the banks will be more likely to press for stability than anything else, since they will be as likely to lose market share from a change in regulations as to gain from it.
All of this leads to a surprising conclusion: maybe the United States should encourage its biggest banks to get even bigger.
Freelance business journalist Ian McGugan blogs for the Financial Post.