Healthy banks vs healthy assets

Krugman has a gem on his blog tonight: Vast majorities

Well worth reading the whole thing, emphases mine:


So the market was greatly reassured when Tim Geithner declared that the “vast majority” of banks are well capitalized. Count me as baffled. I mean, maybe he was actually giving us a hint about the stress tests — but I took it as a remark that was uninformative at best, ominous at worst.

After all, there are a lot of banks in America. There are 1,722 institutions on the Fed’s list of “large commercial banks”. And I have no doubt that most of these banks — indeed, the vast majority — are in fine shape. That’s because they’re regional institutions that never got into the risky games played by the big guys.

But the big guys are where the money is. The top 10 institutions on that list have 58 percent of the assets. (If we looked at bank holding companies rather than only commercial banks, assets would be even more concentrated.) So it’s perfectly possible that the “vast majority” of US banks are well-capitalized, but that banks with, say, a third of the system’s assets are insolvent.

What Geithner said, then, was true but useless. If anything, his wording was cause for concern: Treasury knows the difference between raw numbers of banks and asset holdings, even if the press seemed to miss the distinction, and if he’d meant to say that the vast majority of assets are held by sound banks, he would have.