The 50 biggest banks : $68 trillion of assets

Here's something that I haven't done for some time. Accuity has a site where you can get a listing of the worlds 50 largest banks in terms of assets. But the table also provides information about each bank's total capital (based on the latest available data).

So it was very simple for me to generate the following table that shows not only the total value of the assets held by those banks ($68 trillion), but also calculate the ratio of assets to capital.

There's another site that provides a table of the top 100 banks. By including the next fifty banks increases the total value of their assets to $86.8 trillion. That's a lot, but it's actually only about a third of the total amount of debt in the world, which, according to the International Institute for Finance, reached a record $253 trillion at the end of September 2019. Quite who is holding the other $166 trillion is an interesting question, but I won't try and address that one here.

You may be aware that Commercial Banks can effectively create "money" out of thin air when they make loans (as revealed by the Bank of England back in 2014, when they stated that 97% of the money in the UK economy results from the banks making loans). They can also buy assets directly with money that they don't actually have. This is something that does not seem to be widely discussed, but seems to be an inevitable consequence of the system.

You might also think that there are some limits to this ability to purchase assets and make loans. Type "what is the minimum capital requirement for a bank?" into Google, and you will learn that "Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%", meaning that, in principle, you can't have more than 12.5 times more assets than capital.

But if you look at the calculations in my table (which you can find as a Google Sheet here) you will see that the €68 trillion of bank assets held by the fifty biggest banks is associated with capital of just $787 billion, an asset to capital ratio of 86:1. And if you look at individual banks, you discover than five banks have Asset/Capital ratios of over 1000:1 (Wells Fargo, UBS, ING, Société Générale & JPMorgan), with Wells Fargo having a ratio of 3255:1!

How do they get away with this? Well, the trick is that the banks are allowed to use "risk-weighted assets" to calculate their  leverage ratios. And that risk-weighting can be 0%, when the assets are (for example) Government debt for countries that have been rated at between AAA and AA- by the ratings agencies (Standard & Poors, Moody's and Fitch). You can find the current list of risk weightings here, and in a Google Sheet here. And this shows that the following countries are all good bets, in that if a bank wants to create some money to buy Government bonds, they don't need any capital to make the purchase.

• Australia
• Austria
• Belgium
• Canada
• Cayman Islands
• Czech Republic
• Denmark
• Estonia
• European Union
• Finland
• France
• Germany
• Hong Kong
• Isle of Man
• Kuwait
• Liechtenstein
• Luxembourg
• Macau
• Netherlands
• New Zealand
• Norway
• Qatar
• Singapore
• South Korea
• Sweden
• Switzerland
• Taiwan
• United Arab Emirates
• United Kingdom
• United States

This is all very relevant to the topic of my recent blog post, where I was arguing that we should be using the coronavirus crisis to put an end to the current system where governments, when they need funding, just go and borrow from the financial markets (effectively commercial banks) who, not surprisingly, are nearly always happy to oblige. Especially when the country is treated as zero risk - because there is simply no limit to the amount of funding that can be provided.

The Lisbon treaty tried to impose a limit on the ability of governments in the European Union to borrow - limiting borrowing to 100% of GDP. But I know what is likely to happen now. European governments will be saying that they desperately need to borrow money to get through the Corona Virus crisis, providing billions of euros of aid. And, it's quite possible that Christine Lagarde, the new president of the ECB will give special permission to increase borrowing above the 100% GDP limit. 

This may look like good news, but it's not. It means that the Banks will be able to increase the amount of assets they have, driving up global debt even more. It's already soared from $167 trillion to $253 trillion since the financial crash. Do we really need more?

As I argued, it doesn't have to be that way - at least in the UK, now that it is no longer required to follow the Lisbon Treaty and borrow money from the financial markets. It could simply tell the Bank of England to provide the money to the government directly. 

Postscript. I mentioned that this isn't the first time I looked at the 50 biggest banks. I also did the same exercise in  April 2013, September 2013 and in August 2014. And it's very interesting to see how the list has changed. Previously, the list was dominated by big European and US players (DeutscheBank, for example). But now, the five biggest are all Chinese. How times change!