OFR_2016_Financial-Stability-Report

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Figure 66. Five-Year Changes to G-SIB Composite Equity Capital Ratio (percent) Growth in G-SIB equity capital ratios has been driven by retained earnings 20 16 12 8 4 0 -4 Composite equity capital ratio Positive impact on equity capital ratio Negative impact on equity capital ratio 15.88 2010 equity capital ratio - 2.26 Impact of changes to risk-weighted assets 0.15 Impact of net stock issuance 4.31 Impact of retained earnings - 0.42 Impact of other adjustments to capital 17.66 2015 equity capital ratio Note: Annual data from 2011 to 2015. G-SIB stands for global systemically important bank. Sources: Federal Reserve Form Y-9C, OFR analysis G-SIBs already meet these buffer requirements (see Heltman, 2016). However, it is not yet clear how the new buffers will fit into CCAR. G-SIBs may need to boost capital if they have to keep these higher levels under stress. This need may be more difficult in the current earnings environment, because retained earnings account for much of the improvement in G-SIBs’ regulatory capital post-crisis (see Figure 66). For some G-SIBs, raising new equity could also prove difficult. In 2012, regulators introduced the supplementary leverage ratio, an additional minimum for banks with assets greater than $250 billion or with $10 billion or more in foreign exposures. A minimum ratio of 3 percent was set for all banks meeting this criteria, with an additional 2 percent buffer added for banks with more than $700 billion in assets or $10 trillion in assets under custody. The supplementary ratio includes off-balance-sheet items that weren’t part of the pre-crisis U.S. leverage ratio. All U.S. banks must maintain a leverage ratio minimum of 4 percent of on-balance-sheet assets. The leverage ratios are meant to complement risk-based capital requirements, which can potentially be subject to misspecification or model risk. Although simpler than risk-based capital requirements, a possible downside of the leverage ratio is encouraging banks to take risks. In a recent working paper, OFR researchers found an increase in some risk-taking after the introduction of the supplementary leverage ratio. Bank holding companies’ broker-dealer affiliates decreased overall repo borrowing but increased their use of repo backed by more price-volatile collateral (see Allahrakha, Cetina, and Munyan, 2016). This change in repo activity may have implications for these firms’ short-term funding risk. Other researchers have similarly found that a more binding leverage ratio may encourage the broker affiliates of bank holding companies to raise their risk profiles (see Kiema and Jokivuolle, 2014). Although higher capital requirements could be assumed to reduce the risk of failure, some research suggests regulatory capital measures have been poor predictors of bank failure (see Bulow and Klemperer, 2013). 74 2016 | OFR Financial Stability Report
The Federal Reserve’s CCAR has forced several G-SIBs to revise their capital plans. Some of these banks had reported regulatory capital ratios well above required minimums. CCAR has resulted in those banks holding additional capital. In the 2016 CCAR severely adverse scenario, seven of the eight U.S. G-SIBs were closer to a breach of the leverage ratio than they were to a breach of any of the regulatory minimums for risk-based capital standards. The more stringent supplementary leverage ratio is now being phased in. CCAR does not yet measure banks’ ability to meet this new standard. Potential changes in banks’ business models bear monitoring, because the 2016 CCAR results suggest that U.S. G-SIBs are more constrained by leverage standards than risk-based capital standards (see Figure 67). Possible inclusion in CCAR minimums of additional risk-based capital buffers, including the G-SIB buffer, which are also phasing in now, could also affect large bank behavior. Figure 67. Binding Ratios Under the Comprehensive Capital Analysis and Review Large banks in the United States are more constrained by the leverage ratio than by risk-based capital ratios Bank 2013 2014 2015 2016 Bank of America Bank of New York Mellon Citigroup Goldman Sachs JPMorgan Chase Morgan Stanley State Street Wells Fargo Risk-based capital ratio Leverage ratio Binding ratio Breach of ratio Note: Breach of ratio indicates the bank’s regulatory ratio fell below regulatory requirements during the stressed period. If there was no breach of the bank’s regulatory ratio, the ratio that came closest to a breach is indicated as the binding ratio. Sources: Federal Reserve Board of Governors, OFR analysis Conclusion: Macroprudential Supervision and Resolution Planning Need Attention Supervisory monitoring and stress testing need to adapt to increasing noncommercial-banking activities at some U.S. G-SIBs. Supervisors need to monitor whether recent regulatory changes affect banks’ behavior in unanticipated ways or make U.S. G-SIBs more uniform over time. Banks may look safe from a microprudential perspective, but the system as a whole may be more vulnerable to common shocks. This problem argues for a macroprudential approach to monitoring these banks. Living wills for G-SIBs have not met supervisors’ standards. Data gaps in the public portions of living wills may increase uncertainty about what would happen if a U.S. G-SIB were to fail. These data gaps also raise questions about whether exceptional government support for large U.S. banks might occur again in the future. Key Threats to Financial Stability 75
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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
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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 78 and 79: Figure 63. Components of U.S. G-SIB
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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