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We seem to have a case of the proverbial David and Goliath in the banking industry during this Asset Securitization Crisis. On one side, you have the big national, and global behemoths, complete wth derivative trading and underwriting desks, brokerage and sales forces, and M&A and equity/fixed income teams (I'm still waiting for them to give out those free toasters). On the other side you have the banks that this country's banking industry was built off of. You know, those banks that gave out loans to people who they expected to pay those loans back. Banks who kept loans on balance sheet and knew their borrower. In a nutshell, a true bank derives its income from lending and closely related services, while an investment bank, brokerage firm or investment fund derives its income from transaction and investment fees and investment returns.The latter is significantly riskier than the former, yet despite this fact, the latter is much more heavily subsidized and favored by the powers that be than the former.

Well, it appears as if at least one (or two) arms of the Federal government is favoring the former, with a whole slew of alphabetical programs, TARP, this and that, not to mention explicity guarantees that they will not let these banks fail due to their size and the risk they pose to the financial system overall. Of course, they then encourage these banks to get even bigger and pose and even greater threat to the system (see links below).

We have compared the revenue breakup for the top 20 commercial banks with smaller midsized banks (market cap b/w- $250-$1,00 mn).  Large commercial banks on an average derive only 50% of their revenues from core banking operations (net interest income) compared with an average 73% for smaller sized banks.  Even the max Net Interest Income / Total Income for large sized banks (64%) is less than the average of 73% for small and midsized banks. Despite higher risks taken by large commercial banks (undercover hedge/speculative investment funds), as evident from higher proportion of non interest income, these banks have received disproportionate funds from Fed under various programs.

Net Interest Income / Total Income

 

Average

Median

Min

Max

Top 20 banks

50.5%

55.2%

26.2%

64.3%

Banks with market cap of $250 mn to $1 bn

73.1%

74.3%

43.2%

92.6%

  More on the need to break up the big banks:

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
  6. An Independent Look into JP Morgan