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Nicholas Nassem Taleb makes the following passing statement in his latest meditation on the nature and management of risk (Antifragile):

...businesses with negative optionality (that is, the opposite of having optionality) such as banking have had a horrible performance through history: banks lose periodically every penny made in their history thanks to blowups.

He makes the statement in passing and doesn't make a big issue of it but, as a result, doesn't seem to reference the evidence behind the claim.

So the question is: while banks often seem to make a lot of money when things are going well, do they typically lose just as much in banking "blowups" or downturns?

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    That depends entirely on what you (or Taleb) mean by "banks". Investment banks? Commercial lenders? Personal lenders? Does the bank make money by trading? Investing? Loan interest? Securitization? Loan servicing fees? Duration mismatch/IRC plays?
    – user5341
    Commented Feb 13, 2013 at 19:31
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    It's a good question. Many, arguably the vast majority of, individuals who acquire equitable or creditor interests in banks have received a net positive return on their investment over fixed periods of time. Statistically a bank failure is an oddity, which perhaps contributes to its newsworthiness. It is true that over a long enough time frame virtually all banks will go bust, but how is this different from any other financial vehicle? Even most states default on debts. I think the claimant is conflating "horrible performance" with "occasional blowup".
    – Brian M. Hunt
    Commented Feb 13, 2013 at 20:29
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    @BrianM.Hunt - The claimant is generally considered quite knowledgeable in finance. Therefore, he's unlikely to make random basic mistake :)
    – user5341
    Commented Feb 13, 2013 at 21:08
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    @DJClayworth I'm not even sure most banks would still exist without state bailouts. State money will blur the profit picture.
    – matt_black
    Commented Feb 13, 2013 at 22:29
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    @0xC0000022L No. My question isn't about the way banks operate internally. The issue is whether the external value added is greater than the external losses they incur when the blow ups occur. Banks can't make profit directly by creating money.
    – matt_black
    Commented Feb 14, 2013 at 22:22

2 Answers 2

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No.

The first thing that needs to be mentioned is that the regulatory environment is very different across (otherwise) similar countries. For example, USA has thousands of registered banks, some of which go bust every year. Meanhile, Canada has a very limiated number of 'Schedule I' banks . So, the bankruptcy rates in Canada are much lower. Given that, blanket statments like that by Nicholas Nassem Taleb do not make much sence.

But more broadly, Nicholas Nassem Taleb seems to suggest that banking is some sort of a zero-sum game - that is not so. Banks have different lines of businesses, the vast majority of which do not deal with 'speculative' trading but rather with mundane things like accounts, loans, mortgages, money transfers, etc where revenue is made up of service charges and premiums on prime rates which they earn by making business transactions more efficient.

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In "The Black Swan" Nassim Taleb writes on page 314 his evidence for the claim:

Banks losing all their past profits: Money center banks (around eight banks) had a capital base of around $22bm in 1982. They carried on their books around $54bn of loans to emerging markets, the bulk of which just four countries: Mexico, Brazil, Argentina, and Venezuela. The default precipitated the "paper" value down markedly (I estimated at least about $30 billon, with a minimum of $25 billon based on traded "paper"). The banks did not reflect the market value on their books. We saw in the early 80s paper trading at 25 cents while banks marked it at 1 dollar with a small reserve (net at about 90 cents to the dollar). How did I infer that it exceeds their lifetime cumulative profits? I looked at their record and noticed that they made around $12 billion in the previous 8 years and had 10 billion capital base earlier. Details from the Federal Deposit Insurance Corporation at http:/www.fdic.gov/bank/historical/history/contents.html, Chapter 5.

(It would be nice to have the position of someone besides Nassim on the topic, but the excerpt is to long for a simple comment so I put it into an answer).

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    There are several points in which Taleb's comment doesn't answer the question. (1) It refers to one 8 year period (not periodically). (2) The 8 year period was cherry-picked from a larger table of 15 years. (3) That larger table was demonstrating what happened in a large crisis (the topic of that chapter), so it was cherry-picked around a bad time for the banks. (4) It is "only" 8 banks, not the whole banking industry.
    – Oddthinking ♦
    Commented Feb 14, 2013 at 22:49
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    I confess, I don't actually understand how the numbers support his argument: over the full 15 year period, I see the stock price growing, average income being very high (despite 2 or 3 bad years), capital doubling and a government intervention but no bailout.
    – Oddthinking ♦
    Commented Feb 14, 2013 at 22:50

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