Financial Risk Stays Concentrated

The 30 most systemically important global banks have combined exposures that exceed 75% of world GDP.
Vincent RyanDecember 2, 2015
Financial Risk Stays Concentrated

The largest global systemically important banks (G-SIBs) are dangerously large, in some cases dwarfing their country’s annual gross domestic product. And globally, just five countries are home to the headquarters of 23 so-called G-SIBs with total exposures (loans plus other assets) of $50.203 trillion, or 64.5% of world GDP.

“The ratio of total exposures to GDP is not an inherently risky number, but it does demonstrate how concentrated financial risk has become, especially considering the list of 30 G-SIBs is top-heavy,” said a report from SNL Financial. “The world’s 30 G-SIBs have $59.759 trillion in exposures; the top 20 banks account for 83% of that total.”

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Among the five nations with at least three G-SIBs — China, France, Japan, the United Kingdom, and the United States — France and the United Kingdom have the highest G-SIB exposures-to-GDP ratios at 287.8% and 273.7%, respectively, said SNL Financial. A fourth Chinese bank joined the G-SIB list this year, raising the country’s ratio to 121.3%. SNL said Japan had a similar ratio at 134.9%. (See chart at bottom of page.)

Ironically, the G-SIB designation, which began to be used by the Financial Stability Board as early as 2009, is designed to motivate banks to downsize and become less of a risk to financial markets and national economies.

A very large exposures-to-GDP ratio at the individual country level means a country is heavily reliant on that bank or banks, and puts into question the financial capacity of the country to deal with G-SIB bank failures.

In addition, “the fewer the banks and the larger their assets-to-GDP exposure, the more pressure it puts on governments to bail them out [in a crisis],” James Barth, a senior fellow at the Milken Institute and finance professor at Auburn University, told SNL Financial.

In the United States, the eight G-SIBs combined had an exposures-to-GDP ratio of 86.4% at the end of 2014. That was almost two percentage points lower than in 2013, largely due to growth in loans and other assets that lagged the country’s GDP growth.

JPMorgan had the highest total exposures in the United States in 2014, that number increasing nearly 5% in 2014 to $3.74 trillion. The mega-bank is number two in total exposures to Industrial & Commercial Bank of China.

Total exposures, an indicator used by the Basel Committee on Banking Supervision, is a more comprehensive measure than total assets because it includes derivatives exposures and securities financing transactions, says SNL Financial.

“It is also measured consistently across jurisdictions, whereas the measurement of assets varies with national accounting standards,” according to the banking industry research firm.