Bank of America (NYSE:BAC) is a big bank. But just how big it is surprised me recently when I measured its size in a less common way.
The usual way to gauge a bank's size
Analysts and commentators almost always compare banks based on the total size of their balance sheets -- that is, by the cumulative value of their assets. This makes sense when you consider that a bank's assets are a primary source of revenue.
By this measure, there's no question that Bank of America is massive. At the end of the third quarter, it reported just under $2.2 trillion worth of total assets on its balance sheet, split between loans, interest-earnings securities, and a variety of other asset types.
Yet, even though that's enormous, it's nevertheless smaller than one of Bank of America's principal competitors: JPMorgan Chase (NYSE:JPM).
Going into the financial crisis, JPMorgan was ranked third in terms of assets -- Citigroup was first, followed by Bank of America. Fast forward to today, however, and JPMorgan Chase is now the biggest bank in the United States, with $2.5 trillion worth of assets on its balance sheet -- click here for the full list of America's 10 biggest banks by assets.
Measuring size by capital
But despite JPMorgan Chase's ascent, which was fueled by its 2008 acquisitions of Bear Stearns and Washington Mutual, it still lags behind Bank of America if you measure size a slightly different way. Namely, by looking at the quantity of shareholders' equity, or capital, on their respective balance sheets.
This is what's left over after you subtract a bank's liabilities from its assets. In layman's terms, it's what a bank is worth according to the bank's own estimate of the market value of its assets and liabilities. (This shouldn't be confused with a bank's market capitalization, which is the total market value determined by investors of its outstanding common stock.)
When you measure size in this way, it turns out that Bank of America is actually the biggest bank in the United States. It has $270 billion worth of capital compared to JPMorgan's $254 billion. Citigroup and Wells Fargo round out the four biggest banks by capital, at $232 billion and $203 billion, respectively.
On the one hand, this is good for Bank of America and its shareholders, as it means that the North Carolina-based bank has more than enough capital to survive even the most extreme economic downturn. On the other hand, given that Bank of America has so much capital relative to assets, it operates with less leverage than, say, JPMorgan Chase or Wells Fargo.
Using less leverage may not sound like a bad thing, but it's one of the reasons that Bank of America is less profitable than other banks, as a bank that can buy more assets with a given amount of capital is going to generate more revenue than a bank that's able to buy fewer assets.
Thus, while impressive, Bank of America's legitimate claim to being the biggest U.S.-based bank when measured by the quantity of capital on its balance sheet is clearly a double-edged sword.