There is "too big to fail," and then there is "too ridiculously big to fail."


Source: Company website

Bank of America (NYSE:BAC) falls into the latter category. Sometimes it takes a little context to understand exactly how ridiculously big Bank of America and the other megabanks really are. The problem is that when you view their size in that context, the conclusion is terrifying.

A "megacommunity bank" for comparison
Every quarter, the Federal Deposit Insurance Corporation, the FDIC, publishes data that aggregates the banking industry and then breaks it down to establish the state of the industry. This report is called the Quarterly Banking Profile (link opens a PDF), and if you are at all concerned about "too big to fail" banks, then this report should absolutely terrify you. Let's break it down into the nightmarish details.

According to the FDIC's definition, there were 6,163 community banks in the U.S. as of June 30. If you were to aggregate all of these community banks and lump them into one gigantic "megacommunity bank," that institution would have total assets of $2 trillion and total equity capital of $224 billion, and it would have reported a profit of $4.9 billion in the second quarter.

Now, the terrifying part 
Bank of America reports total assets of $2.2 trillion, total equity capital of $204 billion, and net income of $2.3 billion. 

 MetricTotal of All 6,163 Community BanksBank of America
Total assets $2 trillion $2.2 trillion
Total deposits $1.7 trillion $1.3 trillion
Total equity capital $224 billion $204 billion

Q2 2014 net income 

$4.9 billion $2.3 billion

In other words, Bank of America is 110% the size of all 6,163 of the existing community banks in the U.S. all combined into one. Fellow mega banks Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) only amplify the too ridiculously big to fail problem. 

JPMorgan has over $2.5 trillion in total assets (125% of all U.S. community banks), and Wells Fargo has about $1.6 trillion in total assets (80% of all U.S. community banks). Combine just these three institutions and you have an aggregate of $6.3 trillion in assets. That's over three times more than the total of all 6,163 community banks and about 41% of total industry assets.

That's right: These three banks control almost half of all the assets in the entire U.S. banking industry. In fact, the largest 1.6% U.S. banks control 81% of total industry assets.

BAC Total Assets (Quarterly) Chart

BAC Total Assets (Quarterly) data by YCharts

What about all the synergies of having that scale?
In theory, having a larger asset base should allow banks to run more efficiently. Back-end operations can be consolidated, redundant costs can be eliminated, and profitability on a relative basis should increase.

Unfortunately, the data doesn't support these theories in the banking industry. The "megacommunity" bank we constructed reported $4.9 billion in profits in the second quarter. Even adjusting Bank of America's profitability to exclude many of the non-recurring and non-core expenses, it still underperforms the community bank competition. B of A's net operating income, as reported on its quarterly regulatory filing with the FDIC, was just $4.3 billion.

Wells And Big Building

Wells Fargo reported net operating income on its regulatory filing of $5.4 billion. JPMorgan reported $5.3 billion. 

The arguments for syneries quickly falls apart in the face of these profit numbers. JPMorgan has 125% the assets of all U.S. community banks but can produce only 108% of the profits on an NOI basis?

Wells Fargo does buck the trend (80% of the total assets and 110% of net operating income), though that efficiency is much more likely a result of its being an exceptionally run bank -- just like the countless exceptionally run community banks with industry-beating financial results.

For example, the FDIC's Quarterly Banking Profile reports that the average efficiency ratio for banks with assets greater than $10 billion was 59.5%. For banks with assets between $1 billion and $10 billion, the industry average was 65.4%. The efficiency ratio is a measure of a bank's non-interest expenses as a percentage of its net revenue -- a lower percentage is a better ratio.

We can see that larger banks do, on average, have better efficiency than their smaller peers. However, that difference is hardly enough to validate having so many assets concentrated at the very largest of banks. Does that slight efficiency advantage justify having the three banks discussed here controlling 41% of the entire industry?

It doesn't take a rocket scientist
In this light, you don't need to be a top government regulator, Ph.D. in finance, rocket scientist, or otherwise to recognize the problem with these too-big-to-fail institutions. If any of these institutions or the handful of other "too big to fail" banks were indeed to fail, the repercussions would be at least as bad as -- or, more likely, worse than -- the failure of every single community bank in the United States.

For the U.S. financial system, for investors, and for everyday citizens, these conclusions are downright scary. The problem is not that these banks are too big to fail, it's that they are too ridiculously big to fail.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Apple, Bank of America, and Wells Fargo and owns shares of Apple, Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.