Too Big To Fail

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12 March 2009
Bart Narter
In the US banking industry people talk about banks being too big to fail, but I am concerned about another phenomenon: the bank that is too big to save. At what point does a bank become so big that if it were to fail, the government would be hard-pressed to bail it out. The FDIC (note that the I stands for Insurance) has said that it is not willing to take a risk greater than 10% of the US deposit base. Some banks are getting dangerously close to this limit, and may perhaps be on the other side of it. Now is not the time to ignore risk management. The concentration of deposits is also a cause for worry [but I worry a lot]. The top five banks in 1995 had 11% of all deposits and today they have 37% of all deposits. Yet, it could be far more concentrated. Our neighbors to the north, in Canada, find themselves with the top five banks controlling 94% of deposits and the top six banks controlling 98%. Royal Bank of Canada (RBC) has over 25% of deposits and Toronto Dominion (TD) has over 20%. These banks might not only be too big to fail, but also too big to save!

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