Service on Finance and Development (Oct20/01)
Geneva, 2 Oct (Andrew Cornford*) – With the progressive expansion of their coverage since 1970, the annual global surveys of the monthly review, The Banker, furnish a valuable overview of the strength and performance of major banks, and thus of their capacity to withstand the pressure of unfavourable developments or financial crises.
However, the picture is a static one and does not provide information on important sources of susceptibility to such crises.
Multi-storey connections between banks – in which a large part of the assets of banks financed by their liabilities are the liabilities of other banks rather than finance for real economic activities – can lead to excessive vulnerability of the banking sector to unfavourable changes in economic conditions, for which the banks themselves may be at least partially responsible.
Inclusion in the global surveys of discussion of management leading to such situations would be difficult as it would require a breakdown of banks’ liabilities and assets, which on the basis of their financial reports could prove to be difficult.
However, the commentaries on developments involving the banks of major countries and regions that accompany the statistical sections of the surveys could be extended to cover vulnerabilities due to the structures of major banks’ assets and liabilities.
Every July since 1970, the monthly review, The Banker, has surveyed the world’s top banks. Initially, the survey took the form of the ranking of 300 banks by the amount of their assets. The survey has progressively expanded and now ranks the top 1,000 banks. The methods used for the ranking have been extended during the survey’s 50 years, now including less emphasis on size and more on other data concerning the strength and performance of the entities covered.
Nevertheless, account is not taken of many important determinants of standing in the ranking, especially the size of the economy in which the entities operate. This is especially important for comparisons of banks in different countries and at different levels of development. Thus, the ranking should be taken as a guide only subject to such caveats.
The trends revealed by the surveys nonetheless do bring out interesting dimensions of the economic and political weight of the world’s major banking entities and of the national banking sectors of which they are a part.
Moreover, the data for the presence of foreign-owned subsidiaries in different countries, though only covering one of the forms which cross-border presence can take, provide some indication of the increase in the scale of cross-border banking through commercial presence and thus of a major mode of delivery of financial services.
In the 1970 survey, the 300 banks were ranked by total assets. In 1980, the coverage of entities was expanded from 300 to 500. In 1990, the coverage was extended to 1,000 and the measure of size was changed to Tier 1 capital.
Tier 1 capital consists of shareholder funds (equity capital, the form affording most comfort to creditors) with deductions on both the asset side (such as goodwill) and the liability side (certain equity reserves) of the balance sheet.
This shift reflected the importance of Tier 1 capital in the rules for the regulatory control of banking risks in the Basel Capital Accord (now in its fourth version, Basel IV) negotiated through the Basel Committee on Banking Supervision.
For the banks ranked in surveys by size, data are also provided for total assets and assets weighted for their risk as defined in the Basel Capital Accord, capital in relation to assets, profitability, non-performing loans, and loans in relation to assets. Users can themselves estimate alternative rankings for entities of countries, regions, or other groupings according to indicators other than size, such as resilience indicated by the ratio of loan losses to total loans, of non-performing to total loans, and of impairment charges to total operating income.
In 2020, The Banker extended the deployment of its database to construction of a model which enables estimation from data for 18 indicators of eight performance categories: growth of major assets and liabilities and of operating income, profitability, operational efficiency, asset quality, return on risk-weighted assets, liquidity, soundness as measured by the capital-assets ratio, and leverage as measured by the ratio of total liabilities to total assets.
As is discussed below, the ranking of countries’ biggest banks by these performance categories may differ substantially from that by Tier 1 capital.
The country data in recent surveys also include for countries with banks in the top 1,000, data on the number of foreign-owned subsidiaries, which constitute an important part of the commercial presence of foreign banks. In earlier surveys, foreign banks are simply specified as “foreign owned”, a category likely to be the same as that of foreign-owned subsidiaries.
TRENDS IN OVERALL RANKINGS
In the early surveys, the upper reaches of the rankings were predictably dominated by banks from developed economies. Banks from communist economies such as the enormous Soviet Gosbank were initially not included owing to operating models reflecting functions and balance sheets different from those of commercial banks in non-communist countries.
This was to change over the next two decades. From the point of view of subsequent history, the most important change was the adoption of China’s Open Door Policy in 1979, which was to lead to the modernization of the Chinese banking industry.
In the 1970 survey, the top ten banks by size were dominated by institutions from the United States, with just two from the United Kingdom (Barclays and National Westminster) and one from Italy (Banca Nazionale del Lavoro).
Dominance by banks from developed economies was to continue until the new millennium. But there were changes in the nationality of banks in the top ten, changes which reflected both developments affecting the size of individual banks (such as the structure of national banking sectors following mergers and acquisitions) and the relative size of national economies.
The concentration of banks in 1980 by country is less than that for 1970: only two of the top ten are from the United States, four including the largest (Credit Agricole) are French, two are German, one is from the United Kingdom, and one is from Japan. Of the French banks, three had been nationalised in 1945, and had low ratios of capital and reserves to assets.
Such ratios were considered a source of unfair competition by other developed economies such as the United States owing to the way in which capital levels were thought to be affected by the implicit guarantee of government support, and became a significant part of the argument for the minimum capital requirements agreed under the auspices of the Basel Committee on Banking Supervision in 1988 (Basel I).
The 1980s was a period marked by a remarkable inflation of asset values in Japan, the land of the Tokyo Imperial Palace being reckoned as worth more than the state of California. This was reflected in the ranking of six Japanese banks in the top ten in the 1990 survey with three of them ranked in the top three places. These were accompanied by two banks from the United Kingdom, and one each from France and Germany.
At the beginning of the 1990s, the Japanese bubble burst. In the 2000 survey there were still four Japanese banks in the top ten but the first two and the fifth places were occupied by banks from the United States. The other three banks in the top ten were from the United Kingdom, France, and for the first time, China (Industrial Commercial Bank of China or ICBC).
The global rise of the Chinese banking sector was under way as indicated by the presence of two other Chinese banks ranked 14th and 15th and one more in the top thirty.
In the 2010 survey there was still only one Chinese bank (ICBC) in the top 10, and three others in the top 30. But the growing importance of Chinese banks was evident in other statistics. By size, the Chinese banks in the ranking accounted for more than 60 per cent and by number for 40 per cent of the figures for the top 25 Asian banks.
In a comparison of the relative size of the banks in the top 25 from BRICS countries (Brazil, Russia, India, China and South Africa), China accounted for 72 per cent of Tier 1 capital, while the figure for Brazil was 17 per cent, that for India 6 per cent, and that for Russia 5 per cent.
The three largest banks (Bank of America, JPMorgan Chase, and Citigroup) as well as the sixth largest (Wells Fargo) in the 2010 ranking were from the United States. Of the others in the ranking, three were from the United Kingdom (Royal Bank of Scotland, HSBC and Barclays), and one each from France (BNP Paribas) and Spain (Santander).
The 2020 survey indicated in a more stark way the increased global weight of Chinese banks which now occupied the top four places by Tier 1 capital as well as seven further places in the top 25. The four banks from the United States in the top 10 in the 2010 ranking occupied the next four places in that of 2020. They were followed by one bank each from the United Kingdom and Japan.
OTHER DATA ON PERFORMANCE
As already mentioned, the annual surveys cover many other data on the positions of the top 1,000 banks’ performance (though regrettably the summaries in the discussion preceding the statistical tables do not follow a uniform format from year to year). These data include capital, profits, and the ratios of non-performing loans and loan losses to total loans.
Of special interest for supervisory assessment are ratios of total risk-weighted to total un-weighted assets. In the 2010 survey, which provides regional data (excluding China and Japan) for the period during the early part of the global financial crisis, the figures (in percentage terms) were as follows: Africa 54.07; Asia-Pacific (excluding China and Japan) 53.08; Central and Eastern Europe 83.69; China 61.85; Western Europe 32.60; Japan 36.95; Middle East 69.46; North America 59.35; and Latin America and the Caribbean 54.10. The total global figure was 48.79.
Such aggregates indicate considerable regional variation in estimated risks associated with banks’ exposures, variation likely to reflect partly compression of required regulatory capital associated with riskier exposures as a method for increasing profits in relation to capital.
In 2020, The Banker decided to extend its analysis to a set of eight indicators of performance: (1) annual percentage in assets, loans, deposits and operating income; (2) various indicators of profitability and its determination; (3) operational efficiency as measured by costs in relation to income; (4) asset quality as measured by the growth in provisions, non-performing loans, and charges for asset impairment in relation to total operating income; (5) return on risk-weighted assets; (6) liquidity as measured by the loan to asset and loan to deposit ratios; (7) soundness as measured by the ratio of capital to assets; and (8) leverage as measured by ratio of total liabilities to total assets.
The new performance indicators for 2018 and for changes between 2017 and 2018 were estimated for a survey published in January 2020 ranking the ten top banks by performance in the five BRICS. This enabled a comparison for each BRICS of rankings by Tier 1 capital (size) with rankings according to the performance indicators of The Banker.
Perhaps unsurprisingly, the rankings were divergent, though arguably less so for China than for the other BRICS. The divergence is still greater for alternative groups containing larger numbers of each country’s banks.
For China, four of its largest banks also appeared in the ranking of the top five by performance, though not in the same order in the two rankings, ICBC, for example, the largest bank, being ranked only fifth by performance. In the other BRICS, the largest bank was never that ranked first by performance: of Brazilian banks, Itau Unibanco Holding, the largest by 2018 Tier 1 capital, ranked 4th by performance; of Indian banks, the largest, State Bank of India, ranked 6th by performance; of Russian banks, the largest, Sberbank, ranked 4th by performance; and of South African banks, the largest, Standard Bank Group, ranked 3rd by performance.
The banks with the highest performance indicators (other than those of China) were ranked by size as follows: for Brazil Banco do Nordeste do Brasil 7th; for India HDFC Bank 2nd; for Russia Alfa Bank 4th; and for South Africa African Bank 7th.
The country data in the surveys include the presence of foreign-owned subsidiaries (fos). These are a highly important form of cross-border finance and a subject which was a source of lengthy and sometimes contentious discussions in the negotiations on cross-border trade in financial services during the Uruguay Round.
In the General Agreement on Trade in Services (GATS), the third mode of supply is by service supplier of one member of the agreement in the territory of another member, in other words, through the commercial presence of the supplier.
Such presence for banking services can take one of three forms of foreign banking establishment: a branch, which does not have separate legal status and is an integral part of the foreign bank; a subsidiary, a legally independent institution which is wholly or majority owned by a bank which is incorporated in a country other than that of the subsidiary; and a joint venture or consortium whose principal operations are conducted and controlled by two or more parent institutions, most of which are foreign and not all of which are necessarily banks.
The focus of the surveys of The Banker on fos alone is presumably due to the difficulty of precise separation of required statistical indicators of size, strength, soundness and performance for foreign banking entities belonging to the other two categories of banking establishment.
Of the total of 1,124 entities (including fos) in the July 2020 survey of The Banker, 246 were fos. The landscape of foreign-owned subsidiaries in different jurisdictions at any time is the result of multiple causes: the policies of the banks involved, the rules on market access for and regulation of foreign banks, the treatment of mergers and acquisitions, and historical relations between these jurisdictions and countries with major financial markets (in some cases former metropolitan countries).
These variations are evident in the statistics of major emerging market economies and recent entrants into the ranks of developed economies. One group which illustrates this variation is the BRICS. Nine of the 20 Brazilian banks in the survey were fos; 6 of the 23 Russian banks were fos: 7 of the 17 Indian banks were fos; 13 of the 158 Chinese banks were fos; and none of the 7 South African banks was a fos.
For Asian countries which experienced domestic or external pressures (or both) to consolidate their banking sectors in the aftermath of the Asian financial crisis of the late 1990s, the figure for fos and domestic banks are as follows: 12 of 23 Indonesian banks were fos; 5 of 17 Malaysian banks were fos; 2 of 12 South Korean banks were fos; and 7 of 17 Thai banks were fos.
These figures can be compared to banks of countries or territories which were not subject to post-crisis pressures: 13 of 18 Hong Kong banks were fos; 1 of 5 Singaporean banks was a fos; and 3 of 33 banks of Taiwan were fos.
Similar variation reflecting the multiple origins of fos is evident in corresponding figures for selected developed economies. One of the 12 Canadian banks was a fos; 2 of the 8 French banks were fos; 4 of the 26 German banks were fos; 11 of the 44 United Kingdom banks were fos; and 20 of the 205 United States banks were fos.
With the progressive expansion of their coverage since 1970, the annual global surveys of The Banker furnish a valuable overview of the strength and performance of major banks, and thus of their capacity to withstand the pressure of unfavourable developments or financial crises.
However, the picture is a static one. It does not provide information on important sources of susceptibility to such crises. A feature of recent experience in major countries has been the huge increase in the liabilities of financial institutions in relation to the economies’ underlying productive structures.
Multi-storey connections between banks, in which a large part of the assets of banks financed by their liabilities are the liabilities of other banks rather than finance for real economic activities, can lead to excessive vulnerability of the banking sector to unfavourable changes in economic conditions, for which the banks themselves may be at least partially responsible owing to ill-judged lending and financial engineering as well as other speculative exposures.
Inclusion in the global surveys of discussion of management leading to such situations would be difficult since it would require breakdowns of banks’ liabilities and assets, which would be difficult on the basis of their financial reports.
However, the statistical sections of the surveys are accompanied by commentaries on developments involving the banks of major countries and regions. These commentaries could be extended to cover vulnerabilities due to the structures of major banks’ assets and liabilities.
[* Andrew Cornford, a former senior economist at UNCTAD and now with the Geneva Finance Observatory, contributed this article to the SUNS.]