OFR Brief Examines Data on Systemically Important Bank Holding Companies

The OFR released a brief today analyzing new data about the nation’s most systemically important bank holding companies — financial institutions whose failure could pose the greatest threat to the international financial system.

The brief, which reflects the views of the authors and not the views of the OFR or the Treasury Department, shows that the largest banks satisfy international standards for risk-based capital, including a new capital buffer for global systemically important banks (G-SIBs). But those same institutions have relatively low leverage ratios (calculated as Tier 1 capital divided by total exposures) compared to smaller banks. Capital acts as a buffer or cushion against losses. Thus, the authors argue that higher risk-based capital requirements for the largest institutions “could enhance the resilience of the financial system.”

The authors performed their analysis using a new dataset collected by the Federal Reserve to evaluate systemic importance of large bank holding companies. The dataset, available here, uses five indicators: (1) size, (2) complexity, (3) global activity, (4) interconnectedness, and (5) substitutability, or whether customers would have difficulty replacing the company’s services if the bank failed. (The companies filed their reports through the Banking Organization Systemic Risk Report, Form Y-15, as of Dec. 31, 2013.) The authors also applied the OFR’s own indexes for financial connectivity and contagion for additional insights about each of the companies.

The analysis focused on eight U.S. bank holding companies identified by the Federal Reserve as G-SIBs based on methodology recommended by the Basel Committee on Banking Supervision (BCBS), a group of banking supervisors from 28 jurisdictions, including the United States. Each G-SIB must hold a capital buffer based on its systemic importance score.

The authors noted that the largest banks generally scored highest for all indicators. However, size was not the only important factor in determining a bank’s systemic importance. Several of the largest banks recorded high systemic importance scores because they dominated specific businesses, such as payments and asset custody services, while others scored high because of the complexity of their business lines.

The authors noted that “some dimensions of systemic importance are not captured by the indicators.” For example, the substitutability indicators do not directly measure all critical services, such as clearing and settlement operations. Consequently, the BCBS methodology may understate systemic importance.

This is the first issue in the new OFR Brief Series. This new research product is designed for a broader audience than our working papers and staff discussion papers. OFR briefs may discuss recent developments in the financial system or analyze the financial stability implications of financial and regulatory policy.

The brief is available on the OFR website: “Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data,” by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young.

Patricia Mosser is Deputy Director for Research and Analysis at the Office of Financial Research