Over the past year, a handful of vocal critics have questioned the size and scope of activities of large banks and argued that these organizations should be subject to new limits on size and permissible activities. When considering such limits, one should consider the relative size of the largest banking institutions in relation to other countries and other industries, along with tangible benefits that they provide.

The Comparative Size and Concentration of the U.S. Banking Industry

The U.S. banking system, measured as total banking system assets as a percentage of GDP, is, at 117%, smaller than those of other developed countries, including the UK (373%), Germany (332%), and Canada (138%), and less than the average of all G20 countries (162%).¹

In addition to being among the smallest banking systems relative to GDP, the U.S. is among the least concentrated of any major economy.² By total assets, the five largest U.S. commercial banks are a smaller portion of total GDP than any other G7 nation.³

The banking industry is also less concentrated than many other important U.S. industries.⁴

The Role of Large Banks within the U.S. Banking System

Given the diverse consumer and business needs throughout the United States, the industry features a wide range of banks by size and structure, from credit unions and community banks to mid-size and regional banks to large and global banks. Each category of banks has a role to play in the U.S. banking system, serving customers, fostering growth, and preserving financial stability.

Large banks are a necessary partner as U.S. companies become more and more global. International markets increasingly drive U.S. economic growth, with non-U.S. revenue increasing 14% for America’s largest companies over the past decade.⁵ Large U.S. banks with global footprints are poised to enable corporations to continue to grow internationally and achieve greater efficiencies domestically and abroad, which will help continue to grow the U.S. domestic economy.

Large Banks Generate Unique Benefits

Large banks are able to generate unique benefits in certain products and markets that smaller banks are unable to create. These unique benefits fall into three categories:

1. Economies of scale: Reducing unit costs by spreading fixed costs over a large customer base, particularly for infrastructure and technology.
2. Scope of products and services: The provision of a broad set of products and services in an integrated and comprehensive manner provides added benefits to customers.⁶
3. Spread of innovation: A large customer base is important to gain the critical mass necessary for faster adoption of innovation.

In a 2011 study, The Clearing House estimated that these benefits amount to $50-$110 billion annually for companies, consumers, and governments.⁷ Other independent research has reached similar results. Joseph Hughes and Loretta Mester, in a 2011 Philadelphia Fed working paper, found economies of scale at institutions of up to $100 billion in total assets.⁸ In a St. Louis Fed working paper, David Wheelock and Paul Wilson found that banks with more than $1 trillion in total assets experience increasing returns to scale. Wheelock and Wilson then considered imposing a $1 trillion cap on assets at these institutions. Their study estimated that the imposition of a $1 trillion cap on U.S. banks would result in costs to society of $79.1 billion annually.⁹

Any debate on the appropriate size and activities of banks should take into consideration the entire U.S. bank ecosystem. Banks, both large and small, have unique roles to play in, and offer unique benefits to, the U.S. economy and financial system.

Notes:

¹ Source: Bank Indonesia, Bank of Canada, Bank of Japan, Bank of Korea, Board of Governors of the Federal Reserve System, Central Bank of Brazil, Central Bank of Turkey, China Banking Regulatory Commission, Comision Nacional Bancaria y de Valores de Mexico, Company filings, European Central Bank, International Monetary Fund, Reserve Bank of Australia, Reserve Bank of India, South African Reserve Bank, and Swiss National Bank. Note: Banking system assets generally refers to commercial banks, domestic credit institutions, and savings institutions, though
definitions may vary moderately by country.

² Strengthening Our Financial System, U.S. Department of the Treasury, December 2012, available at http://www.treasury.gov/connect/blog/Pages/Strengthening-Our-Financial-System.aspx.

³ Source: Board of Governors of the Federal Reserve System, Bank of Canada, Bank of Japan, Central Bank of Brazil, Central Bank of India, China Banking Regulatory Commission, European Central Bank, International Monetary Fund, Reserve Bank of Australia, and Swiss National Bank. Note: Top 5 Bank Asset data is as of December 31, 2011. Banks presented on a U.S. GAAP basis when available; otherwise, the data was adjusted to exclude IFRS reported derivative assets for an estimated proxy for U.S. GAAP derivative netting rules.

⁴ Source: U.S. Census Bureau. Note: Concentration defined as the sales, receipts, or revenue from the top 4 firms as a percentage of the total sales, receipts, or revenue within the industry. U.S. Census Bureau releases industry concentration data every 5 years with 2007 being the most recent release.

⁵ Source: Capital IQ and company filings. Note: Fortune 50 corporations that derive all sales from the U.S. or do not report geographic segments have been excluded. In cases where a Fortune 50 corporation reports geographic segments, but does not report a U.S. segment, the North America segment is used as a proxy for the U.S. where available.

⁶ Note that this category of benefit is different from the microeconomic concept of “economies of scope,” which refers to the reduction in cost due to the sharing of fixed costs across multiple product lines.

⁷ Understanding the Economics of Large Banks, The Clearing House Association, L.L.C., November 7, 2011.

⁸ Hughes, J. and L. Mester, "Who Said Large Banks Don't Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function," Working Paper 11-27, Federal Reserve Bank of Philadelphia, July 2011, available at http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-27.pdf.

⁹ Wheelock, D. and P. Wilson, “Do Large Banks have Lower Costs? New Estimates of Returns to Scale for U.S. Banks,” Working Paper 2009-054E, Federal Reserve Bank of St. Louis, revised May 2011, available at http://research.stlouisfed.org/wp/2009/2009-054.pdf.

For more information on the role of large banks in the U.S. financial system, please see the following studies by The Clearing House:
Scaled to Serve: The Role of Commercial Banks in the U.S. Economy (2012)
Understanding the Economics of Large Banks (2011)