Wednesday, February 18, 2015

JP Morgan tops list of risky banks per new Government report

This probably will not come as a surprise. A new government agency report lists the banks that are the biggest systemic risk. You would expect the biggest banks to be on the list and they are. Here is a link to the article on Reuters. And here is a link to the actual report. Below are some quotes from the article and then a few comments.


"JP Morgan Chase & Co bears the highest potential hazard to the financial system if it were to fail, a staff study released by a U.S. government research agency showed, providing a first-of-its-kind numerical risk ranking of U.S. banks."

"The bank had a "systemic risk score" of 5.05 percent for 2013 in a group of 33 large U.S. bank holding companies, the study by staffers at the Treasury Department's Office of Financial Research (OFR) said."

. . . . 

"Citigroup Inc ranked second in the amount of havoc it could unleash on the financial system if it were to fail, with a score of 4.27 percent. Bank of America Corp was third at 3.06 percent, followed by Morgan Stanley and Goldman Sachs Group Inc, the study showed."

. . . . 

"The latest study looked at 33 U.S. banks with assets over $50 billion. At that size, such banks are deemed "systemically important" and are subject to tighter rules. The eight largest banks in the group need to meet even tougher standards. But size was not the only determining factor in measuring the risk in these banks, the study said."

"Several of the largest banks scored high in systemic importance because they dominate specific businesses, such as payments and asset custody services," the study said. "Others scored high in complexity because of their trading and derivatives businesses."
My added comments:

Again, this is not really surprising information. This story ties in well with our recent blog post about the latest BIS study on global credit risk management. It all just confirms that systemic risk is still out there and taken very seriously. We need to take it seriously as well. The article above mentions some banks "scored high in complexity because of their trading and derivatives business." Also, note the statement I underlined below on "measuring, monitoring, and evaluating multiple aspects of systemic importance" from the actual report.

Here is the introductory paragraph to the actual government report (which you can see here):

"The authors used a new dataset collected by the Federal Reserve System to evaluate the systemic importance of the largest U.S. bank holding companies by comparing their scores on size, interconnectedness, complexity, global activity, and dominance in certain customer services (known as “substitutability”). They also applied an OFR financial connectivity index to the data to measure interconnectedness. Overall, the analysis reinforces the need for measuring, monitoring, and evaluating multiple aspects of systemic importance."

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