Watch Your Ratios
By Arnold Kling
The horizontal axis shows total assets of banks as a share of the economy of their home country. The four largest U.S. banks by assets are JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. The vertical axis shows total assets of all commercial banks as a share of GDP. By either measure, U.S. banks are relatively small in international terms.
Here is how I think about this:
Banks/GDP = (Banks/Financial Sector)(Financial Sector/GDP)
My impression is that the reason that the ratio of commercial bank assets to GDP is low in the U.S. is that the ratio of commercial bank assets to the financial sector is low. I believe it was even lower before the financial crisis and the policy response.
However, I would wager that the ratio of the overall financial sector to GDP is quite high here. I think that both ratios on the right-hand side matter. I think that the U.S. is somewhat healthier than other countries because of its relatively low ratio of bank assets to the overall size of the financial sector. But I think that the size of our financial sector relative to GDP is unhealthy on the high side.