Inside Financial Services

Chart of the Week: Why Big Banks Have an Enduring Advantage

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From my pal Jason Goldberg at Barclays, a neat visual summary of why big banks’ competitive advantage is material and likely permanent. Over the past decade or so, large banks have simply become more efficient at running their businesses than small and midsized banks are. And with the avalanche of mandated new compliance spending brought on by Dodd-Frank and other post-panic banking reforms, large banks’ efficiency edge isn’t apt to go away any time soon.

 

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7 Responses to “Chart of the Week: Why Big Banks Have an Enduring Advantage”

  1. Avatar Marty Tantum

    It may be just me but it would be interesting to see the ratios at different asset classes for super large banks at $100 Bn or $500 Bn or more. Feels like the ratios are from a prior generation but you are looking at 1984 on, so I can see why you have to measure at a minimum lower asset size.

    • Avatar Randall Grossman

      I recall a column of Tom’s from a few years ago where he compared not only efficiency ratio but other measures of performance for classes of banks larger than $10 billion. My recollection is that his finding was that the economies of scale disappear by about $50 billion. If I recall correctly, he found only one metric correlated with bank size above $50 billion: executive compensation.

  2. Avatar Bill Mason

    It 80% is a better efficiency rating than 55%, it looks to me like the chart is backwards.
    The broad blue line for assets > $10bn is on the bottom.

  3. Avatar Anonymous

    Also, the ability to co-opt regulators with centimillion dollar fines funded by passive shareholders. A shark/remora relationship writ large.

  4. Avatar FF

    Is this data skewed in some way, survivorship bias? I find it interesting that the banks with assets less than 100M have efficiency ratio’s in the >75% area. Thanks for sharing.

    • Avatar JHJ

      Some of it has to do with universal banks having more ability to generate fee income on top of interest income. Those businesses tend to be higher margin too. More revenue + better margins = better efficiency ratio.

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