The Bankwatch

Tracking the consumer evolution of financial services

An important new analysis of global corporate ownership demonstrates US and European banks have largest concentration

What is this, may you ask and why on this blog?  A piece from the New Scientist.  (ht – jpg)

This graphic shows the 1,318 inter-connected companies that represent a disproportionate concentrated control over the global economy.  There are 43,000 transnational companies.

It was produced by three complex network scientists working in Switzerland.  Their report is here (pdf).

The 1,318 represent 3.2% by number of all transnational companies.  The thing that is most illuminating is the dramatic degree of control exercised by banks (40% of ownership).  This actually surprised me until I read deeper.

Here is the report abstract “The network of global corporate control” – emphasis mine.

The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

The analysis defines control using ownership as the proxy but that is not the point.  I see this is further insight into why the banking crisis occurred in Sept 2008.

Institutional ownership, including mutual funds have become the largest corporate owners and that is why Banks as issuers of Mutual Funds are so highly ranked in this ranking.  Although it is worth noting for the conspiracy theorists, the US mutual funds represent only a small fraction of all global financial institutions.  Much of the institutional ownership is centred in Banks.

The chart demonstrates clearly the concentration of control within a small number of companies and that those companies are banks.  If we repurpose this chart from the report to align by country we get the pie chart shown.

imageA staggering 97% of ownership within this group is centred in US, UK, France, Switzerland, Germany and Japan.  In fact 83% are represented by UK, UK and France.

Despite all the talk of GDP shifts to the East, India and China barely show on this chart.

Fast forward to todays headlines and the worried brows in France and Germany.  It is this concentration of interconnectedness of ownership that makes for shakey ground when one or more of their joint assets (Greek, Italian and Spanish sovereign debt) is going to be written down by a substantial margin.  The demonstrated interconnectedness of banks guarantees ripples that are not well understood, but this report is an important new view into this murky world.

Relevance to Bankwatch:

Banks’ motivation is driven by reaction to risk and for the large banks, global risk.  This kind of new analysis suggests some insight into why we saw the panic in 2008 and the reaction when Lehman Bros went bankrupt.  This uses 2007 data and therefore includes Lehman Brothers which is useful.  At 0.43% of the top 50 (representing 40% of all world transnational corporate ownership) , Lehmans owned 0.17% (o.43% * 40%)  of all world transnational companies as defined here.

Yet when Lehmans went down in Sept 2008, the worlds banks were already distrusting each other.  This was not a regional phenomenon, nor a large vs small one.  Literally all banks stopped trusting any other bank, and looked only to their respective Central Banks.

It strikes me that the other dimension on the top 50 here is whether they have any additional risk that effects them which is non-systemic and specific to their bank.  Bank of America with its enormous iceberg of bad debts and derivative liability springs to mind.  The difference with Lehmans was they were not trusted and that was why they were allowed to go under in 2008.  The lesson was that despite best intentions, the international banking system cannot easily survive such a test.

This is a bank phenomenon, and none of the increased capital requirement from Basel 3, nor increased oversight from Dodd Frank deals with the core matter of power centralisation that is demonstrated in this analysis.  It represents an important contribution to the debate on the Volker Rule and Ring Fencing.

Written by Colin Henderson

October 22, 2011 at 11:58

Posted in Uncategorized

2 Responses

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  1. If i were a Chinese creditor of Europe and the UK, this is what I would want.

    Jim Smyth

    October 22, 2011 at 14:35

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