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Tarullo’s Shrink-the-Banks Plan: Performance Numbers Back Him Up

Federal Reserve Governor Daniel Tarullo recently proposed a system that could have the effect of breaking up, or shrinking, some of the biggest banks, and it seems the stock market has taken a dim view of the very same institutions.

Tarullo proposed limiting banks’ non-deposit liabilities – in other words, their borrowing. Given that in most recent big bank bailouts, non-deposit creditors have been made whole, a huge potential liability for the U.S. government on top of its exposure to deposits insured by the thinly-capitalized Federal Deposit Insurance Corp., Tarullo’s approach would reduce the public sector’s exposure to an industry that seems to episodically (S&L crisis in the ‘80s; most recent financial debacle) bring itself to ruin.

The Wall Street Journal, following up on the news, published a fabulous table of big banks ranked by the percentage of their liabilities that aren’t deposits.

Goldman Sachs (GS): 93.4%

Morgan Stanley (MS): 89.9%,/p>

Citigroup (C): 47.2%

J.P. Morgan Chase (JPM): 46.8%

Bank of America (BAC): 46.2%

(To be fair, Goldman and Morgan Stanley had to become bank holding companies, and thus submit to bank regulation, as part of the industry bailout, and their business model has never involved wide-scale collection of insured deposits. Nonetheless, they are huge institutions that deal frequently with insured banks, and thus represent a potential threat to the safety and soundness of the banking system, which the Fed is charged with protecting.)

Only J.P. Morgan is trading above its tangible book value, indicating investors doubt the value carried in the balance sheets of the other four.

Wells Fargo (WFC) and US Bancorp (USB), however, trade far above their tangible book value, and their non-deposit liabilities make up just 21.7% and 23.2% of their total liabilities, respectively.

WFC Price / Tangible Book Value Chart

WFC Price / Tangible Book Value data by YCharts

These more conservatively-managed banks also outperform the riskier institutions in what many regard as the most crucial bank performance yardstick, return on assets.

WFC Return on Assets Chart

WFC Return on Assets data by YCharts

GS Return on Assets Chart

GS Return on Assets data by YCharts

Better-performing banks with less obvious risk? Given that taxpayers are the ultimate backstop, that seems a reasonable goal. A second need: greatly increasing the size of the FDIC insurance fund so it could actually liquidate a big bank. Or two.

Jeff Bailey is the editor of YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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