By Nat Hoopes

The largest banks are bigger than they have ever been before.”

This claim is frequently made by critics of large banking companies as proof that the phenomenon of “Too Big To Fail” is still with us.  The claim however is highly misleading, ignoring the fact that the vast majority of the growth in the largest banking companies occurred during the financial crisis, when large healthy diversified banking companies absorbed smaller less diversified financial companies that were in trouble, often at the request of, and with the assistance from, U.S. regulatory authorities.

This claim also misleads casual observers by ignoring the impact of the Dodd-Frank Act and other recent reforms.  The right question for policymakers and voters isn’t “are banks bigger or smaller?” but rather “have we addressed the problem of ‘Too Big to Fail?’ – i.e. the impression that taxpayers will be forced to step in and support certain financial sector firms in a future crisis. The right way to assess whether or not any new law, regulation, or policy is working is to examine the period following enactment and compare it to other periods.  Looking at the changes in financial sector concentration in the four years following the passage of the Dodd-Frank Act in 2010, the facts look very different. The largest banks have grown much more slowly than their smaller peers, and therefore have been losing market share, resulting in a less concentrated financial sector.

Now, let’s take a quick look at the history and facts on bank size in the U.S. to further spell out this point.

America’s largest diversified banks did grow during the height of the financial crisis in 2008 as they stepped in and acquired their failing peers.  Bank of America absorbed troubled mortgage firm Countrywide and the brokerage Merrill Lynch, JPMorgan acquired Washington Mutual and Bear Stearns, and Wells Fargo significantly increased its footprint with the purchase of Wachovia. While these acquisitions created both opportunities and significant challenges for America’s largest financial institutions there is no doubt that these acquisitions helped prevent more damaging shockwaves through the economy, such as the credit freeze that followed Lehman Brothers’ shocking bankruptcy filing.

Then, in 2010, Congress took up the mantle of financial reform, pushing for sweeping changes to everything from the way the government deals with troubled financial institutions, to mortgage securitization, to derivatives trading. The result of that effort was the Dodd-Frank Act, which included significantly enhanced scrutiny and new regulations for the largest, “systemically important” U.S. banks.

How has the Dodd Frank law impacted the growth of the largest firms? Since enactment of the Dodd-Frank in 2010, the largest six U.S. banks’ (those with over $500 billion in assets) growth has slowed dramatically.

  • Because of Dodd-Frank and other restrictions, the six largest banks have lost market share in absolute terms (measured by total assets) to regional banks and midsized banks.
  • As a result of these changes, in the United States, the banking industry has become significantly less concentrated by a number of measures. Looking at the three largest banks assets compared to total banking assets, the International Monetary Fund finds that the U.S. banking sector is less concentrated than it was in 2009.
  • Additionally, bank holding companies with more than 500 billion in assets share of total assets has fallen from 68% to only 63%.
  • U.S. banking remains significantly less concentrated than banking in peer economies such as Canada, the U.K, Japan, and a majority of the OECD.  The growth of midsized banks shows that the U.S. has robust competition in this sector, although the smallest U.S. community banks continue to face challenges and large banks are supportive of regulatory relief for smaller banks to help relieve these burdens.
  • Banking and financial services in the U.S. remains less concentrated than many other sectors of the US economy, such as cable television, broadband, air travel, meat processing, and others.

Finally, looking carefully at bank growth also sheds light on the set of issues surrounding “Too Big to Fail.” In part because of the new Dodd-Frank law, but also due to the political environment, the market perception about the likelihood of future bailouts has also changed.  In testimony before the House and Senate last week, Treasury Secretary Jack Lew highlighted the financial regulatory progress made in the U.S. by pointing to the changing data in the financial markets related to bank borrowing costs and future bailouts. Here’s what Lew said at the House Financial Services Committee on Tuesday:

“And, I think if you look at the question that is often asked about the implicit subsidy for large banks that is a reflection of the market’s belief that there is a willingness to step in, we’re seeing that way lower, if not eliminated.”  

That changed market perception is due to a number of factors, but the one that looms largest is that the Dodd-Frank law has set up a new process for unwinding a large troubled firm in a way that forces bank creditors and industry participants, rather than taxpayers, to be first in line for potential losses. Therefore, the expectation from credit rating agencies and others is that a potential future crisis will see a bank’s creditors “bail-in” the bank through the “single-point-of-entry” approach, rather than a taxpayer bailout.

While we have no doubt that bank critics will continue to question the size and scope of the largest firms, it’s important that any policy discussion begin with a common set of facts, and those facts are clear: the biggest banks did grow as a result of the financial crisis-era marriages. Since the passage of Dodd-Frank, however, growth has slowed and the firms have lost market share. Concurrently, bank asset concentration and the likelihood of a taxpayer bank bailout has declined.  That’s good news for the economy, which needs healthy banks of all sizes – from global banks to regional banks to community banks – and for an industry that is working hard to reboot after the financial crisis and restore the public’s trust.