Number of the Week 13.3%:

13.3%: Assets of the top five U.S. banks as a percentage of all U.S. financial firms’ assets.

Size has advantages. But in the case of the biggest U.S. banks, it could also be one of the greatest weaknesses in the global financial system.

The top five U.S. commercial and investment banks — Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo and Goldman Sachs — have emerged from the financial crisis larger than ever. As of the third quarter of 2010, they had a total of $8.6 trillion in assets, according to data provider Capital IQ. That’s 13.3% of all U.S. financial firms’ assets as calculated using Federal Reserve data, up from 11.8% three years earlier, when the financial crisis hit.

Size can be good, allowing banks to compete globally and provide services to customers at the lowest possible cost. But it also gives the top banks a lot of political influence. That could be a problem at a time when new financial-reform legislation has given U.S. regulators more leeway than ever in reshaping the rules by which the banks operate.

Under the new Dodd-Frank legislation, the U.S. banking system could be completely transformed or stay pretty much the same. Regulators, for example, have the power to set strict limits on how much debt — or leverage — banks can use to finance their activities. The new Office of Financial Research will actually have subpoena power to obtain the information it needs to assess the risks in the system.

Using a lot of debt — as opposed to equity, or capital — is attractive to banks in large part because it allows them to play a heads-I-win-tails-you-lose game with taxpayers. In good times, leverage boosts returns for banks’ shareholders. In bad times, it makes a bank’s failure so potentially destructive that taxpayers have no choice but to bail it out. The bigger and more levered the bank, the more urgent the bailout.

It thus comes as little surprise that banks have been pushing to keep capital requirements low, despite an increasing number of economic papers suggesting that capital requirements as high as 50% would be a net benefit for the economy (for a couple examples, see here and here.

What seems forgotten is that banks’ increasing size, together with governments’ own parlous finances, could prevent taxpayers from bailing anyone out next time around. To be sure, tougher rules for big banks could push more risky activity into the shadows, creating another challenge for regulators. But unless we create a world in which banks can’t be too big to fail, we could soon come face to face with banks that are too big to save.

Update: This post was updated to clarify that some data come from the Federal Reserve.