J.P Morgan Chase Co. represents the biggest systemic threat among the big U.S. banks, according to new research from the U.S. Department of the Treasury.
The U.S. Treasury’s Office of Financial Research has published a report that analyzes new data on the most systemically important banks, which could pose the greatest threat to the international financial system if they failed. It finds that JPMorgan is the most systemically important firm, considering a range of criteria, including the banks’ size, complexity, interconnectedness, substitutability and cross-border activity. JPMorgan is followed in the rankings by Citigroup Inc., Bank of America Corp., Wells Fargo & Co., and Goldman Sachs Group Inc.
The analysis is based on a new dataset collected by the U.S. Federal Reserve to evaluate systemic importance of large bank holding companies. It notes that size is not the only important factor in determining a bank’s systemic importance. “Several of the largest banks recorded high systemic importance scores because they dominated specific businesses, such as payments and asset custody services, while others scored high because of the complexity of their business lines,” it says.
The report also cautions that some dimensions of systemic importance are not captured by the indicators; which suggests that the systemic risk of certain firms may be understated. One of these factors is the extent to which a bank engages in maturity and liquidity transformation, it says, “Funding long-term illiquid assets with short-term liabilities can make a bank resolution more difficult.”
Another factor is the extent to which a bank’s home sovereign relies on the bank for funding activities and financial services, it says; “this type of reliance can contribute to a bank’s systemic importance.”
Additionally, it says that the current substitutability indicators do not directly measure all critical services, such as clearing and settlement operations.
The report, which reflects the views of the authors and not the Treasury Department, also finds that the largest banks meet the new international risk-based capital standards, including the added capital buffer for global systemically important banks. However, it notes that those same institutions have a greater reliance on leverage, compared to smaller banks.