OFR_2016_Financial-Stability-Report

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Figure 63. Components of U.S. G-SIBs’ Operating Income ($ billions) Declines in provisions and expenses have exceeded income declines since 2010 300 200 100 0 -100 -200 -300 -400 Net Interest Income Provisions Other Income Noninterest Expenses 2010 2015 Pretax Operating Income Note: Pretax operating income equals net interest and other income less provisions and noninterest expenses. Other income includes noninterest income and securities gains or losses. G-SIB stands for global systemically important bank. Sources: SNL Financial LC, OFR analysis Figure 64. Change in Components of U.S. G-SIBs’ Noninterest Income, 2010-2015 ($ billions) The greatest growth came in investment banking and fiduciary activities Wells Fargo State Street Morgan Stanley JPMorgan Chase Goldman Sachs Citigroup Bank of New York Mellon Bank of America -15 -10 -5 0 5 Investment banking Brokerage activities Insurance activities Fiduciary activities Other including noninterest income and securities gains, also declined from 2010 to 2015. Declines in provisions for loan losses and noninterest expenses more than offset these income losses, boosting U.S. G-SIBs’ pre-tax operating income in 2015 as compared to 2010. Given the risks of higher defaults on commercial real estate and nonfinancial corporate loans, provisions may rise, further eroding profits from lending (see Section 2.2). Some U.S. G-SIBs are responding to the net interest income challenges by expanding their fee income from noncommercial-banking activities. Figure 64 shows that there has been growth in investment banking and fiduciary (asset management) activities and, to a lesser extent, securities brokerage. Most other sources of noninterest income have declined. Public regulatory reporting is insufficient to determine how these changes affect the banks’ risk profiles. Commercial banking risks historically centered on bad loans and the potential for depositor runs, mitigated by deposit insurance. Different risks arise from securities dealing, underwriting, trading, over-the-counter derivatives, and prime brokerage and asset management services. The ratio of risk-weighted assets to total assets can be a useful gauge of risk-taking. The ratio provides information about the average risk weighting the bank applies to positions. For example, a ratio of 20 percent would be consistent with a bank assigning positions an average risk weight of 20 percent, which is the weighting of a senior agency mortgage-backed security. From 2011 to 2015, that ratio increased for seven of the eight U.S. G-SIBs (see Figure 65). To what extent the increase has come from increased risk-taking or more stringent U.S. riskbased capital rules is not easy to determine. (As noted in Section 2.1, risk weights can be subject to arbitrage.) However, with the leverage ratio acting as the binding regulatory constraint, some U.S. G-SIBs may be letting their risk-weighted assets rise. Note: G-SIB stands for global systemically important bank. Sources: SNL Financial LC, OFR analysis 72 2016 | OFR Financial Stability Report
Figure 65. Risk-Weighted Assets as a Share of Total Assets for U.S. G-SIBs (percent) Risk-weighted asset densities rose at seven of eight U.S. G-SIBs from 2011 to 2015 Goldman Sachs Citigroup Bank of America 2015 2013 2011 Bank of New York Mellon JPMorgan Chase Morgan Stanley State Street Wells Fargo 0 20 40 60 80 100 Note: G-SIB stands for global systemically important bank. Sources: SNL Financial LC, OFR analysis New Regulations May Pose Unintended Consequences New capital and other standards aim to make U.S. banks more resilient and reduce the risks large banks take. However, some of these changes, in combination with the pressure on G-SIBs’ core earnings from low interest rates and competition from shadow banks, may have unintended consequences. Retained earnings have been the main way these banks have met higher capital requirements since the crisis. The Federal Reserve evaluated the potential impact of negative rates on U.S. banks in its 2016 stress test, the Comprehensive Capital Analysis and Review (CCAR) (see Board of Governors, 2016a). These tests assess capital adequacy. No U.S. G-SIB failed the test’s severely adverse scenario, which included negative interest rates in the United States. However, higher capital requirements are phasing in. They are not yet fully reflected in CCAR’s minimums. Bank regulators have introduced a new concept of capital buffers, an extra cushion on top of regulatory minimums to meet unexpected shocks (see Board of Governors and OCC, 2013). This so-called capital conservation buffer applies to all banks. G-SIBs also face an additional capital buffer requirement tied to their systemic importance (see Loudis and Allahrakha, 2016). The buffers go into effect in stages over the next three years. Key Threats to Financial Stability 73
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OFFICE OF FINANCIAL RESEARCH 2016 F
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Contents Executive Summary ........
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Chapter 2 provides deeper analysis
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of sharp decreases in U.S. equity a
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1 Financial Stability Assessment Ov
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Figure 3. Real GDP Growth (year-ove
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Figure 8. Ten-Year U.S. Treasury Yi
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Monitoring Shadow Banking Risks The
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An earlier OFR paper proposed an ac
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Figure 17. Size, Liquidity, and Con
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Figure 19. Top Systemic Risk Scores
Page 28 and 29: The analysis pointed to seven key t
Page 30 and 31: could. In early 2016, investor conc
Page 32 and 33: earnings or share issuance. But red
Page 34 and 35: Fund Monitor, the OFR assessed expo
Page 36 and 37: 2.2 Risks in U.S. Nonfinancial Corp
Page 38 and 39: Figure 31. U.S. Nonfinancial Corpor
Page 40 and 41: Figure 36. U.S. Corporate Bond Defa
Page 42 and 43: Commercial Real Estate Prices Have
Page 44 and 45: 2.3 Cybersecurity Incidents Affecti
Page 46 and 47: Hackers Breach Bangladesh’s Centr
Page 48 and 49: Figure 42. Banks that Include an Op
Page 50 and 51: The industry is working with the pu
Page 52 and 53: Figure 46. U.S. Financial Regulator
Page 54 and 55: 48 2016 | OFR Financial Stability R
Page 56 and 57: eleased the results of an unprecede
Page 58 and 59: Figure 49. CCP Default Waterfall ($
Page 60 and 61: Figure 50: CCP Ratios and Amounts f
Page 62 and 63: cause more-prudent CCPs to appear m
Page 64 and 65: 2.5 Pressure on U.S. Life Insurance
Page 66 and 67: The experience of Japan’s life in
Page 68 and 69: 2015). These benefits are effective
Page 70 and 71: Figure 55. Life Insurance Securitie
Page 72 and 73: Drivers of Insurers’ Systemic Ris
Page 74 and 75: 2.6 Systemic Footprints of Largest
Page 76 and 77: Interest Rates and Derivatives Expo
Page 80 and 81: Figure 66. Five-Year Changes to G-S
Page 82 and 83: 2.7 Deficiencies in Data and Data M
Page 84 and 85: Figure 68. Examples of Key Post-Cri
Page 86 and 87: Broader Adoption of Data Standards
Page 88 and 89: Better Regulatory Sharing Needed Th
Page 90 and 91: The U.S. Census Bureau surveys publ
Page 92 and 93: The group will also consider how th
Page 94 and 95: and contracts would be crucial. The
Page 96 and 97: Figure 72. Scaling of Data Validati
Page 99 and 100: Glossary 10-Year, 10-Year Forward R
Page 101 and 102: Conditional Value-at-Risk (CoVaR) C
Page 103 and 104: Fire Sale Form N-MFP Form PF Fundin
Page 105 and 106: Liquidity Risk Liquidity Transforma
Page 107 and 108: Pension Funded Ratio Pension Risk T
Page 109 and 110: Stress Test Supplemental Leverage R
Page 111 and 112: Bibliography Adrian, Tobias, and Ma
Page 113 and 114: Board of Governors of the Federal R
Page 115 and 116: www.richmondfed.org/~/media/richmon
Page 117 and 118: Her Majesty’s Government and Mars
Page 119 and 120: Paul, Ruma. “Bangladesh hopes to
Page 121: Zetter, Kim. “That Insane, 18M Ba
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