By John Hintze
Trepp finds interconnectedness makes some banks riskier.
Big banks are still susceptible if the financial system crashes again, according to a report. Analyzing data released by the Federal Reserve, financial research and technology firm Trepp LLC released a study in mid-August showing that none of the biggest banks are immune from systemic financial risk, but some may be safer than others to deal with.
Trepp culled 2013 data from the Fed’s Banking Organization Systemic Research Reports for the 33 largest banks in the US, ranging between $57 billion to $2.4 trillion in assets, after the data was unceremoniously posted on the regulator’s website in late May. The report examines measures pertaining to bank size, interconnectedness, substitutability, complexity, and cross-border exposure.
One finding of particular interest for corporate treasurers monitoring their relationship banks, said Matthew Anderson, managing director at Trepp and author of the report, is the banks’ interconnectedness. The banks place $2.5 trillion in assets at other banks, and they hold $2.4 trillion in liabilities, as recipients of intra-system credit.
At some banks, however, their assets held at other financial institutions exceed their liabilities, and other banks have net positive liabilities. The first kind, Anderson noted, could face significant challenges should another financial downturn arrive. “Goldman Sachs and Morgan Stanley have the most net positive investments in other banks, so a broad downturn where everyone experiences losses could potentially expose them more to losses at other financial institutions,” Mr. Anderson said.
In fact, those very firms had precariously large exposures to AIG when it ran into derivative-related troubles in fall 2008, prompting the Fed’s controversial rescue.
Bank of America and Northern Trust are also net positive in terms of assets held at other financial institutions compared to liabilities, but to a much lesser extent than the former investment banks. However, in terms of asset exposure alone, that is, the assets it holds at other banks, Bank of America rivals Goldman Sachs.
JP Morgan and Citigroup take the prize for the highest volume of intra-system assets as well as liabilities, each in the $500 billion to $600 billion range. However, Bank of New York Mellon and State Street are the largest net recipients of intra-system credit, giving them the largest net intra-system liabilities—unsurprising given they are major custodians.
“You’d want the banks with net liabilities vis-a-vis the financial system to be the safest banks, operating in a safe manner, where you would be assured of sound policies and adequate capital to back up any potential losses,” Mr. Anderson said, adding, “You could instead tolerate some risk taking from banks like Goldman and Morgan Stanley, with net asset exposures.
Mr. Anderson said the largest banks’ interconnectedness is an argument for companies diversifying their relationship banks, to increase the likelihood of maintaining key services such as funding, although the last financial crisis made it all too clear that during a broad downturn credit-related services can dry up.