Are Banks Too Big to Fail or Too Big to Save?

In this study, we consider an international sample of banks over the 1991-2008 period. Accounting data on bank liabilities and other variables are taken from Bankscope. Our sample of banks excludes banks that are categorized as investment banks or securities houses. Also, we restrict ourselves to banks that are publicly-listed to ensure data quality and to enhance comparability across countries. The largest banks in most countries tend to be publicly-traded. 

As a measure of systemic size, we take the ratio of a bank's total liabilities to national GDP, denoted Liabilities (see the Appendix for variable definitions and data sources). This reflects that in practice often a bank's total liabilities, rather than just insured deposits, are honored in a bank bail-out. For 2008, we have identified 30 publicly-listed banks worldwide with liabilities in excess of half of their country's GDP. These major banks are listed in Table 1. UBS, a Swiss bank, had a liabilities-to-GDP ratio of 3.7, followed by ING of the Netherlands with an analogous ratio of 2.2, and Credit Suisse of Switzerland with a ratio of 2.1. Among these systemically large banks, the largest banks in terms of absolute liabilities were Barclays, BNP Paribas, Deutsche Bank and Royal Bank of Scotland, each with liabilities exceeding 2.5 trillion US dollars.  

Appendix. Variable Definitions and data sources

Table 1. Systemically large banks in 2008

This table lists banks with a liabilities-to-GDP ratio exceeding 0.5. Liabilities is the liabilities-to-GDP ratio. Absolute liabilities is the amount of bank liabilities in billions of US dollars. 

The world's largest banks tend to be international banks with large shares of assets and liabilities located in foreign branches and subsidiaries. In these instances, the home-country fiscal authorities tend to remain responsible wholly or in part for insuring the bank's liabilities and for paying for any bail-out. In the European Economic Area (including the European Union, Iceland, Liechtenstein, and Norway), bank deposits located at foreign branches are formally covered by the deposit insurance scheme of the home country, according to the EU directive on deposit insurance adopted in 1994. Furthermore, the EU directive on the reorganization and winding-up of credit institutions adopted in 2001 requires that domestic and foreign bank creditors are treated equally in bankruptcy proceedings, preventing selective bail-outs of only domestic bank liability holders. The distinction between foreign branches and subsidiaries in practice is often blurred, as international banks formally guarantee the liabilities of their foreign subsidiaries, or they de facto have to guarantee these liabilities to prevent reputational loss in case of a foreign-subsidiary insolvency. 

As a measure of banking system size, we can compute ratio of banking-system liabilities to national GDP. Switzerland and the UK have the largest ratios of banking system total liabilities to GDP of 6.3 and 5.5 respectively, as seen in Table 2. The table further shows that 13 European countries are among the 20 countries with the largest ratios of banking-system liabilities to GDP. 

Table 2. Top 20 Countries with the largest system-wide liabilities-to-GDP ratio in 2008

This table contains the list of top 20 countries with the largest sum of bank liabilities to GDP ratio, denoted Sum liabilities.

Table 3 provides additional information on the distribution of systemically important banks internationally in 2008. Country coverage in the table is restricted to those countries for which information on central government indebtedness or the fiscal balance is available from the IMF or the OECD. Columns 1 and 2 of the table first provide information on banking-system liabilities relative to GDP and on the largest bank's liabilities relative to GDP for this larger set of countries. Next, column 3 provides the total number of publicly-listed banks in 2008. The US stands out with a rather large number of 464 banks. The next four columns indicate how many banks are systemically large in that their liabilities-to-GDP ratio exceeds 0.1, 0.25, 0.5 and 1.0, respectively.  

Table 3. Systematically large banks and public finances in 2008

Several countries are seen to have highly concentrated banking systems with rather few but very large banks relative to GDP. Ireland, for instance, has three publicly-listed banks that all have liabilities exceeding half of GDP, while Belgium has three publicly-listed banks of which two have liabilities that exceed GDP. At the other extreme, the US has a highly dispersed banking system with only three banks that have a liabilities-to-GDP ratio exceeding 0.1. These three banks are Citigroup, Bank of America and JP Morgan Chase, with the latter bank having the highest liabilities-to-GDP ratio for any US bank of 0.14.

The final two columns of the table provide the country's central government debt to GDP ratio and its budget balance relative to GDP. Belgium, Greece, and Italy are shown to be countries with several systemically large banks and a high debt-to-GDP ratio of at least 0.9. 

Ireland, on the other hand, similarly has several systemically large banks, but its debt-to-GDP ratio is relatively low at 0.27. 

The huge size of many countries' largest banks reflects that many banks' liabilities have grown faster than GDP over the last two decades. This is evident in Figure 1. This figure displays the percentages of large banks that are defined as systemic by their liabilities-to-GDP ratios in excess of various benchmarks for each of the years since 1991. The percentages of systemically large banks reached a temporary peak in the 1996-1998 period. In the early years of the new millennium, the relative frequencies of systemically large banks declined, but these frequencies reached new highs in the 2006-2007 period, before a slight drop-off in 2008. The percentage of banks with a liabilities-to-GDP ratio exceeding 0.5, for instance, reached a high of 3.36 in 2006, and declined to 2.71 in 2008.  

Figure 1. Percentages of systemically large banks during 1991-2008

This figures shows the percentages of banks with a liabilities-to-GDP ratio exceeding various thresholds. Specifically, Big0.1 displays the percentage of banks with a liabilities-to-GDP ratio exceeding 0.1. Big0.25 displays the percentage of banks with a liabilities-to-GDP ratio exceeding 0.25. Big0.5 displays the  percentage of banks with a liabilities-to-GDP ratio exceeding 0.5. Big1.0 displays the percentage of banks with a liabilities-to-GDP ratio exceeding 1.0.