ECONOMIC REPORT OF THE PRESIDENT

Box 6-2: A Cross-Country Comparison of Bank Size
The financial crisis refocused attention on the challenges posed
by large financial institutions that could threaten the financial system
should they become insolvent, otherwise known as “too-big-to-fail”
(TBTF), (see Box 6-4). Because increases in size may bring additional
risk and managerial challenges, some argue that certain U.S. banks are
so large that, in the event of another financial crisis, there is still a significant
risk that investor uncertainty may force governments to intervene to
prevent another financial crisis.
There may be certain advantages associated with bank size that
help balance the potential risks. For example, large banks enjoy economies
of scale in both operations and in the management of credit and
liquidity risks by holding diversified portfolios of these risks (Hughes
and Mester 2013). Beck, Demirguc-Kunt, and Levine (2006) also provide
evidence suggesting that concentrated banking systems tend to be more
stable and better able to withstand a financial crisis because banks in concentrated
banking systems are more diversified and easier to monitor.
However, healthy large banks may threaten competition and, when near
failure, may threaten the stability of the financial system. One approach
to evaluating whether large U.S. banks are “too large” and subsequently
“too risky” is to compare them with the size, concentration, and systemic
risk of banks of other advanced economies.
How Big is “Big?”
The five largest U.S. banks account for a large share of the U.S.
banking sector’s total assets, market capitalization, and revenue. In a
Bloomberg ranking of the largest banks by total assets as of December
2015, four of the top 20 are based in the United States, with the largest
U.S. bank ranked sixth in the world. However, these U.S. banks do not
appear as large when scaled by measures of the size of the economy.
For example, in Switzerland, Sweden, France, the United Kingdom, and
Belgium, total assets of the top five banks were about two to four times
as large as their home country’s GDP, while in the United States, they
were about half the size of GDP in 2015 (Figure 6-iv). Even if scaled to
the aggregated Eurozone GDP (though this is not the approach used in
Figure 6-iv because the repercussions of these banks’ failure likely would
predominantly fall on the individual country), the top five Eurozone
banks still make up a greater share of their economy than do the top
five U.S. banks (nearly 80 percent of GDP for the former and about 50
percent for the latter).
Beyond the traditional measures of total assets, a number of other
benchmarks may be used to assess the size of banks. Across these mea-
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