The Most Important Bank in the World
Plus: Starling Bank, Norinchukin, Citigroup
Each year, usually in the fall, a team of analysts gathers in Basel, Switzerland to determine which bank in the world is the most important. Armed with pages of financial data, they rank-order banks from all corners of the earth across five dimensions: size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. How a bank scores across the five governs its importance.
Size is easy – the bigger its balance sheet, the higher the bank scores. The largest banks in the world are Chinese; they take the top three slots on this component of the index. Interconnectedness, substitutability and complexity are harder to adjudicate, so the team has developed some proxies. For interconnectedness, they look at balance sheet positions within the financial industry, such as loans to other banks and deposits from them. For substitutability, they look at payments volumes and assets held on behalf of clients – it’s less easy being substituted if clients are locked into your payments network and custody their assets with you. For complexity, they look at trading securities, derivatives and exposure to assets that are hard to value.
For as long as they’ve been doing it, one bank has ranked number one across these three dimensions: JPMorgan.
As a result, while it is not the biggest bank in the world, nor the most cross-jurisdictional (where it ranks sixth behind HSBC, Citigroup and a trio of European banks), JPMorgan is consistently designated the most important. The team conducting the exercise sorts banks into groups of similar importance. Beneath it, HSBC, Citigroup and Bank of America sit together in a bucket, but at the very top, in a bucket all of its own: JPMorgan.
Being crowned the most important bank in the world is somewhat bittersweet. On the one hand, it signals that you have the kind of “moat” that all companies covet – recognition that your business cannot be easily replicated. But it comes with various drawbacks which is why winners tend to downplay the honour. “We are the most important bank in the world,” says JPMorgan never.
The most tangible is a capital cost. Banks in JPMorgan’s bucket are required to carry additional capital equivalent to 2.5% of their risk-weighted assets. American authorities gold-plate the rule, imposing an even higher capital charge of 4.5% of risk-weighted assets. The surcharge means that JPMorgan has to carry around an additional $75 billion of capital, a burden less important banks are free from. Management is not best pleased. “We feel strongly that we have more than enough capital,” said CFO Jeremy Barnum this week. “and that the G-SIB framework [that underpins capital treatment for important banks] is conceptually flawed.”
Another downside is the political attention lavished on important banks. Scarred by the 2008 financial crisis, many policymakers are concerned about the risk of having to backstop the biggest banks with public funds again. They rail against banks that are too big to fail and regularly campaign for their wings to be clipped.
JPMorgan puts up a robust defence. It argues the amount of liquidity and capital it holds renders the need for a backstop unlikely. This week, the bank published a chart showing that its total loss-absorbing capacity (comprising equity and debt that can be written down in the event of trouble) exceeds the entirety of loan losses incurred by all US banks during the 2008 financial crisis.
It also positions itself as a protector rather than a rival to the smaller banks that anxious policymakers favour. “We are one of the largest bankers in America to regional and community banks,” writes Jamie Dimon in his latest shareholder letter. “We bank approximately 350 of America’s 4,000+ banks across the country.”
A final cost is equity valuation. Larger, more important banks frequently trade at a discount to less important peers. There are many factors that drive valuation, not least it may be harder to grow if you are already $3.7 trillion in size, but one factor is complexity. As defined by the Basel committee, important banks are more complex, and complexity is a feature investors typically shy from.
To address this, JPMorgan hosts an annual investor day where executives take turns on stage to explain their businesses. The group held such an investor day this week in New York, its sixteenth in seventeen years (it skipped one in 2021). As well as creating discipline for management to rehearse their business plan and be held accountable, investor day provides a useful forum to educate the market on the contours of the business.
So what did this year’s investor day teach us about what it means to be important?