OFR_2016_Financial-Stability-Report

G-SIB capital surcharge because U.S. regulators capped the substitutability
metric’s impact on a bank’s surcharge (see Board of Governors, 2015).
More reliance on BNY Mellon’s services raises financial stability concerns
because it historically has been difficult to lessen the risks that come
from lack of substitutability. For example, in 1985, BNY Mellon, then the
Bank of New York, received a $23 billion discount window loan from the
Federal Reserve to avert the spillovers from an operational failure in this
market (see Ennis and Price, 2015). The loan was unprecedented in size at
the time and in excess of the bank’s balance sheet, because the firm had also
pledged customers’ holdings of Treasury securities. Industry efforts to plan
for a “new bank” to replace a troubled clearing bank as part of post-crisis
repo market reforms were never fully realized (see FRBNY, 2010). More
recently, in April 2016, bank regulators said BNY Mellon needs to clarify
in its living will the viability of its proposed bridge bank strategy, which is
meant to allow the firm to maintain critical operations in resolution (see
Board of Governors and FDIC, 2016).
Even as the systemic importance of U.S. G-SIBs remains high, living
wills are still weak. In April 2016, U.S. regulators determined that seven of
the eight U.S. G-SIBs’ 2015 living wills were “not credible or would not
facilitate an orderly resolution under the U.S. Bankruptcy Code” (see FDIC
and Board of Governors, 2016). An OFR analysis of the limited data in the
public portions of U.S. G-SIBs’ living wills found little evidence of firms
simplifying their operations (see Bright and others, 2016). Public data on
U.S. G-SIBs’ number of legal entities — layers within the corporate hierarchy
and interconnections across material legal entities — suggest resolution
of a U.S. G-SIB would be challenging. More detailed and standardized
public disclosures are needed to improve confidence that a G-SIB failure
would not be disorderly and spread risk.
U.S. G-SIBs’ Business Models Evolving Due to Earnings
and Regulatory Pressures
Years of low long-term interest rates have hampered bank earnings, putting
pressure on business models and encouraging firms to take risks in new ways
that can be hard to monitor. This pressure is likely to continue because U.S.
interest rates remain at or near historical lows and rates in other advanced
economies continue to fall further below zero.
Profits from traditional bank services — taking deposits and making
loans — have been undermined by sustained low interest rates, growing
competition from shadow banks, and other factors. The U.S. G-SIBs’
income from the spread of interest earned on loans over interest paid on
deposits fell $29 billion from 2010 to 2015, with little offset from other
sources of net interest income (see Figure 63). Other sources of income,
In April 2016, U.S.
regulators determined
that seven of the eight
U.S. G-SIBs’ 2015 living
wills were “not credible
or would not facilitate an
orderly resolution under
the U.S. Bankruptcy
Code.” An OFR analysis
of the limited data in
the public portions of
U.S. G-SIBs’ living wills
found little evidence of
firms simplifying their
operations.
Key Threats to Financial Stability 71