Asset size is no predictor of a bank's financial strength

Kroll Bond Rating Agency has released a study of US bank failures during the financial crisis, which finds that asset size is not a predictor of financial strength.

The study, "Large and Small Bank Performance During the Financial Crisis", breaks the banks into five different groups:
•    Small banks (less than $1 billion in assets),
•    Super-community banks ($1 - $10 billion in assets),
•    Mid-sized banks ($10 to $50 billion in assets),
•    Large banks ($50 to $250 billion in assets), and
•    Megabanks (over $250 billion in assets).

The study makes some surprising findings. Notably, the megabanks were the weakest group and 40 per cent of this group only survived because they were deemed too big to fail and were the beneficiaries of substantial government support.

Banks in the other four groups experienced similar performance trends during the GFC with varying intensities, but no group was significantly stronger than the other during the downturn.



Another surprise is the performance of small banks. While this group experienced the largest number of failures in absolute terms, the smallest banks reported higher regulatory capital ratios than large banks.



Moreover, small banks made more loans during the crisis and continue to do so. In general, it was found that total loans as a percentage of total assets are negatively correlated to the asset size of a bank.



Small and regional banks typically failed because of bad loans, low capital levels and poor earnings. For the megabanks, these same factors applied along with holding impaired securities in off-balance sheet vehicles and reliance on market sensitive funding.



Being overexposed to poorly performing industry sectors was another cause of bank failures.