2. Financial Structure

An alternative measure of banking sector size is total domestic private sector credit held by domestic banks (which excludes claims on non-residents, claims on the public sector and non-funding activities such as derivatives trading).

Alternatively, capital markets can be measured by the volume of markets’ liquidity services (such as the total value of transactions).

Other equity, which includes inside (“closely held”) equity, is excluded for the purposes of this cross-country comparison of external funding sources.

Sources: Open Economics’ Failed Bank Tracker (http://​openeconomics.​net/​failed-bank-tracker/​) and FDIC. Although the FDIC mostly resolves small banks with assets under $100m, it occasionally resolves medium and large banks. The largest bank resolved by the FDIC is Washington Mutual Bank, which held $307bn of assets at the time of its closure in September 2008. Only about 20 banks in the EU are larger than Washington Mutual; over 7,000 EU banks are smaller, and could feasibly be resolved by a European transplant of the FDIC.

For example, Banco di Napoli, a distressed publicly owned bank, was sold by the Italian government in 1997 for a nominal sum to Banca Nazionale del Lavoro and the Istituto Nazionale delle Assicurazioni, and resold in 2002 by these banks to the Sanpaolo IMI (which later merged with Banca Intesa). Similarly, the UK Treasury facilitated the merger of Lloyds with the ailing HBOS in September 2008, overruling the competition concerns raised by the Office of Fair Trading by not referring the case to the Competition Commission. In 2008–09, the Irish government brushed aside the Irish Competition Authority to promote mergers among distressed Irish banks. Once Spain’s property bubble burst in 2008, many of the cajas that had funded the housing boom were distressed or insolvent. The Banco de España’s rescue strategy was to merge them with other banks. Seven cajas merged into a single entity—Bankia—in December 2010. Bankia was subsequently recapitalized by the Spanish government in May 2012.

Between August 2008 and February 2014, the EU Commission received 440 requests from EU member states to provide state aid to financial institutions. The EU Commission did not object to most (413) of these requests, although state aid approvals often entail bank restructuring requirements.

Derivatives were a negligible part of banks’ activities in the early 1990s, but by 2011 comprised 35–40 % of the balance sheets of institutions such as Deutsche Bank and Barclays. (Like other European banks, Deutsche Bank and Barclays report under IFRS accounting standards. Hoenig (2013) discusses the differences between IFRS and GAAP accounting standards, particularly with respect to the treatment of derivatives.)

See Article 43 of CRD I (2000). In that directive, mortgage-backed securities carried the same risk weight as unsecuritized mortgages. However, in the USA, mortgage-backed securities issued or guaranteed by government-sponsored agencies (such as Fannie Mae or Freddie Mac) were assigned a preferential risk weight, incentivizing the development of the MBS market (Acharya et al. 2011).

See Articles 78-83 and Annex XI of CRD II (2006) regarding the standardized approach. Note that the provision of a 35 % risk weight for residential mortgages remains in place in CRR IV (see Article 125), which entered into force in 2013. Exposures to corporates, by contrast, are assigned higher risk weights, except for corporates in the highest credit quality step, which receive a risk weight of 20 %.

See Articles 84-89 and Annex XII of CRD II (2006) regarding the advanced internal ratings approach.