WASHINGTON — U.S. banks remain among the most systemically risky in the world, but the risks posed by Chinese banks are growing rapidly, according to a paper published Wednesday by the Office of Financial Research.
In 2013, the Basel Committee on Banking Supervision began collecting data from the world's largest banks measuring aspects such as size, interconnectedness, complexity, substitutability and cross-border activity in order to estimate the capital surcharge those banks should have to hold to counteract the risk they pose.
Using that data, the OFR, an independent research office formed under the Dodd-Frank Act, found that U.S. banks remain among the riskiest. JPMorgan Chase topped the list, followed by U.K.-based HSBC — both of which fit into a Category 4 level of systemic risk. Citigroup, France's BNP Paribas, Germany's Deutsche Bank and U.K.-based Barclays followed, all fitting into Category 3. Bank of America, Switzerland's Credit Suisse, Goldman Sachs, Japan's Mitsubishi and Morgan Stanley were all assessed as Category 2 risks.
While the status of most U.S. G-SIBs (for global systemically important banks) changed very little in the period examined — between year-end 2013 and year-end 2014 — one exception was Wells Fargo, which had an 18% increase in its risk profile, driven primarily by large increases in "total exposures, intra-financial assets, underwriting activity and foreign claims indicators." Wells remains a Category 1 G-SIB.
But Chinese banks topped the list in terms of rising risk scores. The Agricultural Bank of China, the Industrial and Commercial Bank of China and Bank of China ranked among the top four banks to increase their systemic risk profile, though all three — as well as China Construction Bank, a new addition to the list — are listed as Category 1 G-SIBs.
"Most G-SIB scores did not change significantly from 2013 to 2014, but there was considerable variation," the report found. "The increase in Chinese banks' scores is consistent with other indicators of rising systemic risk in China."
The paper also examines new data provided by the Basel committee about banks not designated as G-SIBs but that might still have significant risk indicators in one category or another. The paper found that some G-SIBs might have lower risks in some categories than non-G-SIBs and vice versa. For example, State Street and Bank of New York Mellon are regulated as Category 1 G-SIBs because of their high substitutability scores, which arise from their status as custody banks. Japan's Nomura Holdings, meanwhile, is not a G-SIB but holds positions in over-the-counter derivatives that exceed those of many G-SIBs.
"In most cases, the data show a clear distinction in systemic importance between G-SIBs and the other banks that disclosed data," OFR Deputy Director for Research and Analysis Stacey Schreft said in a blog accompanying the paper. "However, for a handful of borderline banks, the design of the scoring system appears to have an impact on G-SIB designation because of the weight the Basel Committee put on certain systemic importance indicators."