What it means
In Canada the Big Six are Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada. Analysts reach for six rather than five when they want the full set of large domestic banks that regulators treat as systemically important.
In the United States the label is commonly applied to JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. The last two are investment banking led rather than deposit led, which is why US comparisons of the six have to be read line by line rather than as a single group.
The reason the grouping exists is supervision. Banks of this size are designated as systemically important, which brings extra capital requirements, recovery planning and regular stress tests, because the failure of any one of them would damage the wider economy.
In practice the six are used as a market benchmark. A treasurer syndicates a large facility across several of them, an analyst compares their net interest margin, cost to income ratio and provisions for credit losses, and economists read their quarterly commentary as an early signal on consumer and business credit conditions.
Two cautions apply. The membership is not permanent, since mergers, failures and new entrants change the list over time, and belonging to it describes scale rather than safety, so it is never a substitute for reading the capital ratios.
In practice
Real-world examples.
Example
A mining company arranging a $600,000,000 syndicated facility invites all six large domestic banks so that no single lender takes more than $120,000,000 of the exposure. Spreading the commitment keeps the facility available even if one bank's appetite for the sector changes.
Example
An economist writes a quarterly note on household credit using the six banks' provisions for credit losses. Because the six cover most of the market, the direction of their provisioning is a reasonable proxy for the whole system.
Example
A corporate treasurer negotiating deposit rates plays the sixth-largest bank against the largest. The smaller of the two offers 0.35% more on a $25,000,000 term deposit because it is actively trying to grow its corporate deposit base.
Formula
Calculation
Concentration ratio for the six largest banks, written CR6 = combined deposits of the six largest banks / total system deposits.
Suppose total deposits in a banking system are $2,000,000,000,000 and the six largest banks hold $420,000,000,000, $380,000,000,000, $300,000,000,000, $250,000,000,000, $190,000,000,000 and $110,000,000,000. Adding those gives 420 + 380 + 300 + 250 + 190 + 110 = 1,650 in billions, so $1,650,000,000,000 in total.
CR6 is $1,650,000,000,000 / $2,000,000,000,000 = 0.825, or 82.5%. Note that the smallest of the six holds $110,000,000,000, barely a quarter of the largest, which is why averaging the six together can hide very different business models.Case study
Seen in the real world.
Harbour Line Freight is an invented company used here as an illustrative example. In the story it holds all of its $40,000,000 cash balance and its entire $90,000,000 borrowing relationship with one of the six largest banks in its market, simply because that was the bank the founder used.
After a near miss during a market disruption, when a single systems outage leaves the fictional company unable to make payroll payments for a day, the board sets a policy. Cash is split across three of the six, each with an operating account and online payment capability, and the borrowing is retendered across four of them.
The illustrative conclusion is that operational resilience and pricing both improve with more than one relationship. Working with large, well-supervised banks reduces credit risk, but it does nothing about the risk of being dependent on a single provider's systems.
Watch out
Common mistakes.
- Using the phrase without naming the country, since the Big Six means Canadian banks in one conversation and American ones in another.
- Treating the six as interchangeable, when some are deposit and mortgage led while others earn most of their income from trading and advisory work.
- Reading membership of the group as a guarantee of safety, instead of checking capital ratios, funding mix and asset quality.
Questions
People also ask.
Who are the Canadian Big Six?
The Big Five plus National Bank of Canada, giving Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.
Why do regulators single out banks of this size?
Because the failure of any one of them would spread through the financial system, so they face higher capital requirements and regular stress tests.
Should a mid-sized company bank with one of them or with a smaller lender?
Large banks bring scale, international reach and strong credit standing, while smaller lenders often give better pricing and more senior attention, so many companies deliberately use both.
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