After gleaning through Systemic Important Risk Indicators reported by large U.S. bank holding companies, the Office of Financial Research (OFR) observed the U.S. large banks had relatively low tier-1 leverage ratios compared to smaller banks.
The OFR published a report titled: “Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data” based on Form Y-15 filing for 2013 made by top 33 banks, including eight subsidiaries of foreign banks.
Heightened regulatory expectations on US G-SIBs
As highlighted by ValueWalk, the Federal Reserve Board’s December 2014 G-SIB buffer proposal is considered as the latest example of heightened regulatory expectations on US-SIB, related to capital, liquidity, or risk management requirements. Under the draft proposal, top 30 U.S. banks would be required to hold extra capital of 1 percentage point to 2.5 percentage points under the Basel Committee on Banking Supervision’s (BCBS) G-SIB methodology.
ARK Invest is known for targeting high-growth technology companies, with one of its most recent additions being DraftKings. In an interview with Maverick's Lee Ainslie at the Robinhood Investors Conference this week, Cathie Wood of ARK Invest discussed the firm's process and updated its views on some positions, including Tesla. Q1 2021 hedge fund letters, Read More
In the U.S., each bank holding company with over $50 billion in assets is required to annually disclose its systemic risk indicators to the Federal Reserve by filing a Form Y-15, or Banking Organization Systemic Risk Report. The OFR report has grouped the systemic risk indicators into 5 categories, as captured in the following table:
The OFR analysis reveals the largest U.S. large banks generally scored highest for all systemic risk indicators, but had relatively low Tier 1 leverage ratios compared to smaller banks. The analysis also revealed Basel Committee-recommended capital buffers would still leave U.S. G-SIBs with generally lower capital ratios than other large U.S. banks
As set forth in the following graph, banks with higher overall G-SIB systemic importance scores tended to have lower Tier 1 leverage ratios than the median large non-G-SIB:
Focusing on two measures of size, viz.: total assets and total exposures, the OFC report notes by either measure, the six U.S. large banks dominated the others, accounting for nearly 70% of total assets and 72% of total exposures. The report notes the same six large banks had total exposures 44% larger than their total assets, while the other banks’ total exposures were just 27% larger than their total assets:
As depicted in the following graph, six banks scored higher on the substitutability indicator than their size would suggest:
Some dimensions are not captured by SI indicators
Touching upon cross-jurisdictional activity, the OFC report notes a bank that has large foreign assets and large intra-financial system liabilities is a potential source of spillover risk. As captured in the following graph, the bubble sizes reflect firm size, based on total exposures. The report notes the large banks are the most interconnected and they are involved in the most cross-jurisdictional activity as well:
The OFC report emphasizes that the collection of systemic importance indicators is a significant step in providing information to banking supervisors and the public about the potential impact of the failure of a major financial institution. However the report notes some dimensions of systemic importance are not captured by the indicators. For instance, the extent to which a bank engages in maturity and liquidity transformation are not captured by the systemic indicators. The report highlights that this is an important indicator as funding long-term illiquid assets with short-term liabilities can make a bank resolution more difficult.