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The biggest banks in the United States continue to get bigger every year. But just how big they've gotten depends on how you measure size. After discussing the most common way banks are sized by analysts and commentators, I introduce a second way: ranking the biggest banks by the amount of capital on their balance sheets.
Measuring bank size by assets
The traditional way to gauge bank size is by the value of assets on bank balance sheets. This is why so many authors, myself included, often refer to the, say, 10 biggest banks by assets.
By this measure, the bank at the top of the industry is JPMorgan Chase (NYSE: JPM), with $2.5 trillion worth of assets on its balance sheet. It's followed by Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C), respectively, which have assets ranging from $1.8 trillion in Citigroup's case up to $2.2 trillion in the case of Bank of America.
But using assets to measure a bank's size can be misleading. This is because banks are highly leveraged companies. That is, they borrow a lot of money -- indeed, pound for pound more than any another industry.
In this way, banks are more akin to hedge funds than they are to the prototypical manufacturing or retail company. The big difference, however, is that banks borrow money very inexpensively, by way of customer deposits.
You might not think of the money in your checking or savings account as a loan to your bank -- after all, it generates little to no interest income at current interest rates -- but that's exactly what it is. Your bank uses that money to invest in assets, either by making loans or by investing it in interest-earning securities, such as government bonds.
In Bank of America's case, for instance, it has $270 billion worth of shareholders' equity -- in other words, capital. This is what's left over after you subtract its liabilities from its assets.
Look at that number for a second; it equates to only about 12% of Bank of America's assets. The remaining 88% of its assets are financed by debt -- $1.2 trillion worth of deposits and about $700 billion worth of other types of liabilities, including bonds and credit lines from other banks or institutional investors.
Measuring bank size by capital
Measured in this way -- by capital -- it turns out the Bank of America is the biggest bank in the United States, as JPMorgan Chase has only $254 billion worth of capital on its balance sheet. The top four biggest banks by capital are rounded out by Citigroup at $232 billion and Wells Fargo at $203 billion.
Here are the 10 biggest bank stocks by capital:
Data source: YCharts.com.
For investors in these banks, the amount of capital listed in the table above should be reassuring. I say that because it represents the magnitude of losses in future crises that these banks can absorb before being rendered insolvent.
This doesn't mean that banks like Bank of America, Citigroup, and JPMorgan Chase can't or won't get into trouble in the future. But it does mean that, absent truly extraordinary and unprecedented losses, they should be able to make it through even the toughest of economic times.
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John Maxfield owns shares of Bank of America, US Bancorp, and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.