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From interest rate risk to C-suite and boardroom diversity to succession planning, community bankers need to be acutely tuned in to a combination of global and domestic factors that are changing their world at an unprecedented pace.
October 20 -
Some large U.S. banks are likely to be impacted by recent volatility in emerging markets like Brazil and China. But their opaque risk metrics make it difficult for investors to judge banks' level of exposure.
August 24 -
Democratic presidential candidate Sen. Bernie Sanders is backing a plan to allow the U.S. Postal Service to provide banking services.
October 21 -
Democrats clashed over banking reform Tuesday night during the party's first primary debate, underscoring the sharp divide with GOP candidates on Wall Street issues.
October 14
In the Democratic presidential debate earlier this month, Vermont Sen. Bernie Sanders, who supports breaking up giant financial institutions, reiterated his belief that the three largest U.S. banks “are much bigger than they were when we bailed them out.”
The debate had barely finished when I received an email from an industry supporter who decried Sanders’ claim as myth, but who selectively picked a few journalist quotes to back up the argument. In an industry where financial statistics abound, it is bizarre how often data is conveniently omitted in discussions about the true size of banks and their risks.
Using stats from the Office of the Comptroller of the Currency, I compared data for Bank of America, Citibank, JPMorgan Chase and Wells Fargo at the end of
It is true that JPMorgan’s asset size did decline by 6% between the first and second quarters of this year. However, claiming that it is shrinking is analogous to saying a dieter is shrinking after losing a couple of pounds in a week. If JPMorgan and the dieter continue to shed assets for a few quarters, then we can certainly analyze the numbers to establish whether it is a trend.
But banks are even bigger than Bernie Sanders may realize.
When talking about “too big to fail,” bank lobbyists and journalists are largely silent about banks’ enormous amounts of off-balance sheet assets. The U.S. accounting standards, defined by the Generally Accepted Accounting Principles, let banks exclude a significant number of items such as certain derivatives from their books. Institutions can omit them where credit, market, operational, and liquidity risks are difficult to identify. The resulting opacity forces market participants to become forensic accountants, needing to use magnifying glasses to pour through hundreds of footnotes in the hopes of piecing together the true size of a bank and its risks.
Under U.S. GAAP, derivatives are measured on a “net” basis, which arguably undercounts the total. But international accounting standards are more stringent and more inclusive. For example, a 2013
Unfortunately, new rules from the Dodd-Frank Act still allow the use of some off-balance sheet accounting. U.S. accounting rules permit corporations and banks to exclude their full derivatives’ exposures from their financial statements. They only report “fair value” changes in those derivatives over time. This is akin to a borrower disclosing only the changes in his or her debt over time rather than actual debt levels.
For anyone who is worried about Sen. Bernie Sanders being a socialist, it’s too late: socialism is already thriving on Wall Street. Banks cannot claim that they are true free market advocates when they benefit enormously from opacity, and when they accepted bailouts from taxpayers who never benefited from the industry’s off-balance sheet transactions.
If investors could see the true size and level of banks’ risks, they could instill discipline on the industry by selling their securities. The Securities and Exchange Committee must require that financial statements disclose everything upfront rather than including key holdings only in footnotes. If analysts, the media, and legislators want to do society a service, they should compel banks to lift the heavy veil covering their off-balance sheet activities and models. Otherwise, taxpayers will always be at risk and a true free market will remain a dream.
Mayra Rodríguez Valladares is Managing Principal at
