The Obama regulatory reform package would empower the Federal Reserve to rescue Too-Big-to-Fail financial institutions. Bank of England governor Mervyn King suggested during a June 17 speech at the Lord Mayor’s banquet for London bankers and merchants that the BofE ought to have similar authority. And the European Council proposed last week the creation of a trans-national European System Risk Board to monitor and supervise Too-Big-to-Fail banks in the EU. But a new study from Celent says that the banks in some countries are so big that the respective governments may not be able to bail them out.
For 20 years deposit concentration has been “increasing dramatically” in the U.S., Celent notes, but “other countries have experienced far more deposit concentration, which means that competition can be reduced and systemic risk can be greater.” The report uses the Herfindahl-Hirschman Index (HHI) to help gauge the threat and the ability of countries to sustain their banking sectors if necessary.
The index equals the sum of the squares of market share; under the formula, a country with two companies with an equal 50 percent share would have a 5,000 HHI. An HHI under 1,000 is referred to as unconcentrated; a range of 1,000-1,800 is moderately concentrated; an above 1,800 is highly concentrated.
Because the Federal Deposit Insurance Corp. limits banks to a 10 percent share of deposits, concentration remains relatively low in the U.S., although the HHI jumped to 341 in 2008 from 30 in 1995.
Canada’s has held fairly constant during the same period and stood at 1,872, just into the highly concentrated realm. “Given the extreme concentration, it could be a challenge for the government to bail out one of its largest banks,” writes Celent analyst Bart Narter in the report.
In Japan, the HHI has declined to 942 from 1,173 in 2000, driven by a drop in market share by Japan Post Bank.
French banks clocked in with a 1,117 HHI, and the “market believes that the government has the financial strength to back up the banks,” according to Narter. The same can be said for Germany, with its HH1 of 249, and Spain, with an HHI of 723. But even though Italy’s 857 HHI places its banks in the unconcentrated territory, the country’s “sovereign debt is even more risky than the average of the six largest banks in Italy.”
Russia’s banking sector was the most concentrated of any of the countries discussed in the Celent report, coming in with a towering HHI of 2,058. “Russia has a combination of a very concentrated baking system, a central bank without sufficient reserves, and a monetary authority unable to bail out its banks,” Narter writes. Sweden’s banks are moderately concentrated, with an HHI of 1,377, although the country has “frequently seen its banks considered less risky than its government.”
In the UK, a 933-HHI banking sector “makes up a relatively large proportion of the UK economy,” notes Narter. “The government shifted a great deal of the risk from the banks to itself.” Despite some recent stability, the “market views the UK sovereign debt as more risky than that of France and Germany. Perhaps the banks are too big to bail.”