Changes In Banking Dominance

Largest Banks and Financial Institutions in terms of market cap (source Bloomberg).

1 Year Ago

1. Orco Property France
2. ICBC China A shares
3. Berkshire Hathaway
4. Wells Fargo
5. China Construction Bank H shares
7. JPMorgan Chase
8. Agricultural Bank of China
9. Bank of China
10. Bank of America


1. Berkshire Hathaway
2. Wells Fargo
3. ICBC China
4. JPMorgan Chase
6. China Construction Bank
7. Citigroup
8. Bank of America
9. Agricultural Bank of China
10. Visa Inc

All attention back to US at the moment as American banks gain dominance in the global tapering chaos. EM banks seem to have fallen out of favour after the EM sell down and slower growth projections.

Note that DBS is 76th (prev 74), OCBC 93th (prev 86) and UOB 107th (prev 91).

US banks are out of the woods and will continue to thrive as regulations change and the rest of the world falls behind.

US Banks $40.3 Billion Profit in 1Q Sets Record, FDIC Says (American Banker)

1. Dodd Frank

The Dodd Frank Act whilst still hatching and partially implemented, has effectively shut out the less organised EM banks, most of whom have not embarked on their centralised collateral management projects nor have a system in place to handle one.

As opposed to the Americans and their swat teams of PHDs crunching at the models in their NY offices, the world of derivatives will tapering into the better equipped players.

The SEC and CFTC are widening their scope to cross border derivatives and securities which essentially includes the rest of the world which essentially means, everyone stop doing business till they are American compliant.

Finland has a collateral credibility issue (FT)

2. Basel III

Americans are precluded from Basel 3 while the Europeans and UK banks are still facing significant capital shortfalls.

Eg. German banks €14bn short of Basel III (FT)
Deutsche Bank “horribly undercapitalized”: U.S. regulator (Reuters)
BOE: U.K. Banks Need More Capital (WSJ)

3. Derivatives Dominance

Currently, just five banks control 90% of all derivatives contracts: JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.

With Dodd Frank, the liquidity outside this circle will dry up. The 700 trillion derivatives market dwarves the total of global bond, equity and commodity markets. It makes loans look paltry and central banks looks small.

4. Bail Ins

Risk of Bank Failures Is Rising in Europe, ECB (NY Times)

The European ruling on bail-ins is a 2 edged sword, victory for banks ? defeat for depositors/shareholders/bondholders ? or defeat for banks with no depositors/shareholders/bondholders ?

The plan stipulates that shareholders, bondholders and depositors with more than €100,000 should share the burden of saving a bank, with a taxpayer-funded bailout now being a limited last resort possibility. (RTE)

It looks like all will be flocking to the safer US bets for now.

5. Too Big To Fail

“Bank of America Corp. -1.15% , Citi, J.P. Morgan and Wells Fargo & Co. WFC -0.70% , now control two-thirds of the banking assets in the United States.” (Marketwatch)

TBTF is a good thing and we have seen it happen in 2008 and can rest easy knowing that there is a backstop for the big banks if they get naughty.

All signs are there that US banking dominance will grow. Little banks have no chance as their liquidity pools in international markets dry up. American banks are the largest liquidity providers for the interbank forex markets, the capital markets and the derivatives markets.

They have the armies of former regulators to circumvent for them, the rocket scientists to build the revaluation models that suit them and best accountants to churn profits out of their balance sheets.

It is a new ballpark now.

So when I hear my brother complain about the bank he is working for, which is a reputable one but alas not American, and the walls he is running into to get them on the idea of centralised collateral management and accounting for cost savings (profits) on their capital, I feel sorry for him and the bank, whose shares or sub debt or perp I will not be buying, too.

I am reminded of a conversation I had last year with a bright and young British banker who worked for a European bank. An innocuous question that could only be attributable to youth and idealism popped up. She asked quite hesitantly, for she imagined I was a senior banker, if I thought there was anyone in the bank who knew what was going on ? and the entirety of the picture ? My answer, no. Not me, not my boss, not his boss or his boss’s boss or the CEO for the matter. Its logical. Even Obama does not have a clue too. But we all like to believe in a banking God and for now, his name is Bernanke.