ECONOMIC REPORT OF THE PRESIDENT

deposits—from 1.15 percent to 1.35 percent. The FDIC issued a final rule
increasing the reserve ratio in March 2016 and paid for the increase by levying
a surcharge on top of regular assessment fees for banks with more than
$10 billion in assets, effectively requiring large banks to bear the full cost.
Have Big Banks Become Safer?
Recent research by Sarin and Summers (2016) documents that most
regulatory measures of major banks such as capital levels or liquidity suggest
banks are safer; however, market-based risk measures that reflect bank
equity volatility and default probability seem to suggest that, though risk has
decreased since its crisis peak, it is not in fact lower than the period prior
to the crisis. This is consistent with evidence from sources like the NYU
Volatility Lab, discussed below, that use market measures of risk and finds
that, while risk in the financial system is down considerably from the crisis,
based on market measures, it is not lower than prior to the crisis.
It may be the case that either risk was mispriced or markets lacked the
information necessary to price the risk of individual banks before the crisis.
If either is the case, better information concerning the risks the banks face
could make them appear riskier today relative to the pre-crisis period, when
we had a poorer understanding of banks’ risk. Another explanation for this
finding is that banks may simply be worth less because of the present macroeconomic
environment, regulations that limit banks’ ability to take risky
positions, and loss of the implicit TBTF guarantee.
A central argument of the Sarin and Summers paper, and work like it,
is that the franchise value of banks has fallen. Markets value bank assets and
their business models as being worth less over the past few years than they
were before the crisis. Consequently, one would expect the bank to appear
riskier based on market metrics. Hence, a comparison of market-based
measures pre- and post-crisis reflects the impact of financial reform on bank
safety and soundness and the impact on banks’ profitability. The rules that
made banks better capitalized almost certainly made banks safer and better
able to withstand future crises; however, constant vigilance is necessary to
make sure that, in a changing environment, risks are adequately managed.
Systemic Risk and Identifying Sources of Risk in the System
The crisis revealed the impact that the failure, or threatened failure,
of even a single financial institution can pose to the larger financial system.
Financial reform has helped make the financial system more secure by
identifying firms that pose such a risk and subjecting them to additional
regulatory oversight and other mitigation strategies. In part, it has accomplished
this by improving the coordination of regulatory oversight such that
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