ECONOMIC REPORT OF THE PRESIDENT

Are U.S. Banks Too Big?
The question of whether individual banks are too big is separate
from the question of whether the financial system as a whole is too large
relative to the economy that could come about, for example, with many
smaller firms. This issue is discussed in Box 6-1. Viewed individually,
large U.S. banks do not appear disproportionate to the scale of the economy
when compared with those in other advanced economies. However,
their interconnection highlights the importance of global cooperation
in regulating these large institutions, ensuring that the comparative
benefits of large banks outweigh their risks, and enhancing the resiliency
of the financial sector in the face of an economic downturn. Moreover,
it is important that the size of banks reflects the underlying economics,
including any external risks posed by size, and that there not exist any
implicit subsidies related to size.
stress tests as a complement to its annual Comprehensive Capital Analysis
and Review, a thorough qualitative and quantitative assessment of each
BHC’s capital plan. Within the quantitative assessment, the Federal Reserve
examines the effects of various simulated financial stress scenarios on a
BHC’s capital ratios. The Federal Reserve also examines qualitatively the
BHC’s internal controls, contingency planning, governance, and the overall
robustness of its capital planning process. Those banks that do not pass
the annual review may not make any capital distributions such as dividend
payments and common stock repurchases unless expressly permitted by the
Federal Reserve.
The overall quantity and quality of capital has increased at BHCs since
the crisis. As seen in Figure 6-8, from March 2009 to June 2016, aggregate
tier 1 common equity capital for the largest banks and the BHCs increased
from 4.8 percent to 12.7 percent of risk-weighted assets, well above the
minimum required total capital ratio of 8 percent that the Federal Reserve
adopted in 2013. In the most recent annual review, completed in June 2016,
30 of the 33 BHCs passed the Federal Reserve’s test. The Federal Reserve
objected to the capital plans of two banks, and did not object to the plan of a
third, but required it to resubmit its plan with revisions by the end of 2016.
Liquidity
Federal banking regulatory agencies have also instituted reforms that
help banks survive periods of financial stress by improving their ability to
withstand acute short-term liquidity stress and improve their long-term
funding positions. To better manage short-term liquidity stress, regulators
have raised the quality and stability of the assets that banks hold to ensure
Strengthening the Financial System | 375