Bank Deregulation, Asset Concentration And Safety & Soundness Of Banking Industry

Abstract

In this paper, we examine the pattern of asset concentration among 900 largest bank holding companies in the United States during 1986-2008. The entropy coefficient is used as a measure of concentration because it is said to be theoretically sound and superior to other models due to its decomposition properties (Theil, 1972). Decomposing 900 bank holding companies in nine 100-subgroups and testing the within-set and between-set concentration of total assets and selected groups of individual assets revealed that the bottom 850 bank holding companies did not exhibit a noticeable change in asset concentration.  However, a significant concentration of assets took place among the top 50 bank holding companies. The result of this study, in light of the recent financial turmoil that showed the largest bank holding companies’ (i.e., Bank of America, Citicorp, etc.) systematic risk exceeded their ability to remain solvent, has significant policy implication (i.e., bail out the largest bank under the too-big to-fail doctrine).