The document discusses steps taken to strengthen the US financial system since the 2008 crisis. New regulations have increased bank capital requirements, limited emergency lending powers, and given regulators tools to wind down large failing firms. While bank consolidation has continued, the US banking system remains less concentrated than other major economies. Early signs suggest investors are distinguishing more between financial institutions and perceiving less of a "too big to fail" problem. However, more work remains to build a safer, fairer financial system.

1. Strengthening Our Financial System
D E CE MB E R 2 0 1 2

2. Introduction
Our financial system is fundamentally stronger than it was four years ago, when we endured the worst
financial crisis since the Great Depression. Our banks have added more than $440 billion of fresh capital,
putting them on firmer footing to support lending to consumers and businesses. Our financial institutions
today are also significantly less reliant on short-term financing from private investors, who fled during the
crisis at the first signs of market stress.
Even as policymakers took the necessary steps to stabilize our financial system, they also recognized the
precedent those actions might set. So they put in place a series of measures to help eliminate the perception
that any institution is too big to fail and avoid a repeat of the Fall of 2008.
Regulators face new limitations on emergency authorities employed during the crisis. The Federal Reserve can
no longer provide direct support to individual institutions, as it did with AIG. And the Federal Deposit
Insurance Corporation’s authority to guarantee the financing of bank holding companies was curtailed.
Meanwhile, Wall Street Reform gave regulators new legal powers to facilitate the orderly wind down of large,
failing financial firms. If the government is forced to step in, equity holders will be wiped out, management
will be replaced, and the institution will be dismantled. That way, taxpayers will never again have to bear the
cost of financial firms’ mistakes.
To be sure, our banking system has grown more consolidated in the aftermath of the financial crisis – a trend
that has been taking hold over the last few decades. Yet, compared to its peers, the United States has the least
concentrated banking system of any major advanced economy – and one of the smallest banking systems
relative to the size of its economy.
Some early evidence also suggests that we are making progress addressing the perception that institutions can
still be “too-big-to-fail” in the post-crisis marketplace. For example, investors are increasingly distinguishing
between financial institutions, as measured by a wider variance in credit default swap spreads among the
largest banks. Bank borrowing costs have also increased significantly for the largest, most complex
institutions.
We still have more work to do, but all of this is welcome news for those of us who want a safer, fairer and
stronger financial system.
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3. Stronger Balance Sheets
A SAFER
FINANCIAL
SYSTEM
U.S. banks have nearly doubled their capital levels since the lows during the financial crisis in
order to cushion against unexpected losses, while supporting lending and economic growth.
Meanwhile, banks have almost cut in half their dependence on short-term financing,
establishing a more stable funding base.
Tier 1 Capital Ratios and Short-term Funding for the U.S. Banking Industry
INDEX (2007 Q1 = 100)
150 150
U.S. banks have added
more than $440 billion
2007 Q1 since the crisis.
Tier 1 Common
Capital Ratio
100 100
Short-term
Funding Ratio
50 50
U.S. banks have
reduced short-term
financing by more
than $560 billion since
the crisis.
0 0
2001 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Q1
SOURCE: FEDERAL RESERVE (Y-9C, FLOW OF FUNDS), HAVER ANALYTICS, TREASURY/FSOC ANALYSIS.
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4. Bolstering Bank Capital I
A SAFER
FINANCIAL
SYSTEM
Tougher new capital standards would require more loss-absorbing capital and, in effect, would
nearly double the amount of capital all banks are required to hold.
TIER 1 CAPITAL, AS A PERCENT OF RISK-WEIGHTED ASSETS TOTAL TIER 1 EQUIVALENT
11%
TOTAL TIER 1 2%
8.5%
TOTAL TIER 1 1.5%
6%
Add’l ADJUSTED FOR Common
~2% MORE STRINGENT Equity
Tier 1 Common CRITERIA UNDER
Equity BASEL III*** 9%
Common
7%**
Equity
~4%*
Pre-2010 Capital Requirements Stronger Capital Requirements Stronger Capital Requirements
Under Basel I Under Basel III Using Basel III Risk Weights
U.S. regulators have proposed more
Basel I required that for banks to be
Basel III would require banks to hold stringent risk-weights, which would require
“well-capitalized,” they had to set aside
more Tier 1 capital overall, and more of banks to hold more capital against their
a preponderance of their Tier 1 capital
that capital in the form of common assets. Combined with the heightened Basel
in the form of common equity, which
equity. III standards, banks would, in effect, nearly
more effectively absorbs losses.
double the amount of capital they hold.
* FOR ILLUSTRATIVE PURPOSES. THE 2009 SUPERVISORY CAPITAL ASSESSMENT PROGRAM (SCAP) STRESS TEST REQUIRED COVERED FIRMS TO MEET A QUANTITATIVE 4
PERCENT TIER 1 COMMON CAPITAL RATIO. PREVIOUSLY, REGULATIONS REQUIRED THAT FIRMS’ TIER 1 CAPITAL BE PREDOMINANTLY MADE OF COMMON EQUITY, BUT DID NOT
SPECIFY REQUIRED LEVELS. ** INCLUDES BOTH A 4.5% MINIMUM AND A 2.5% CAPITAL CONSERVATION BUFFER. *** INCLUDING BOTH CHANGES IN RISK-WEIGHTS AND
INCREASED DEDUCTIONS. THE ADJUSTMENT FOR RISK WEIGHTED ASSETS REFLECTS THE AVERAGE OF DISCLOSED BASEL I AND BASEL III RISK WEIGHTED ASSETS FOR BANK
OF AMERICA, WELLS FARGO, CITIGROUP AND JPMORGAN AS OF SEPTEMBER 2012. OTHER BANKS MAY SEE DIFFERENT CHANGES.
SOURCE: COMPANY FILINGS AND TREASURY ANALYSIS.
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5. Bolstering Bank Capital II
A SAFER
FINANCIAL
SYSTEM
 On top of the more-stringent Basel III 2012 Bank Capital Standards
requirements, the largest internationally-active Tier 1 Common Stock, as a Percent of Risk-Weighted Assets
banks must hold an additional capital cushion so
that they can: Potential common equity 1%
o Better withstand financial stress. surcharge on banks that expand
o Bear the costs of the risks they create.
o Allow smaller banks that pose less risk to Common equity surcharge on 1% - 2.5%
compete on a more level playing field. size and complexity
 Additional capital surcharges discourage banks
from becoming big and complex in the first
place.
o Large banks will face a surcharge of
between 1 percent and 2.5 percent based
on their size and complexity. Common Common
o To curb further growth, large banks could Equity Equity
face an additional 1 percent surcharge if 7% 7%
they increase in size and complexity.
 Going forward, banks around the world will also
be required to adhere to a new international
leverage ratio that:
o Sets a floor on the amount of capital a
bank must hold against all of its assets, Minimum Requirements Minimum Requirements
regardless of their risk. for All Banks for Global Systemically
o Brings overseas firms more in line with a Under Basel III Important Banks
tougher leverage ratio that has long been
applied to U.S. banks.
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6. Ruling Out Extraordinary Support
A SAFER
FINANCIAL
SYSTEM
To help end the perception of “too-big-to-fail,” new rules have significantly curtailed or
eliminated many of the powers used to stabilize the financial system during the crisis…
Changes under
Program Description
Regulatory Reform
Guaranteed more than $3 trillion of money TARP legislation prohibits use of the ESF for
market mutual fund shares when faced with the establishment of any future guarantee
Money Market Fund Guarantee Program
a broad-based run; guarantee backed by programs for the United States money market
Exchange Stabilization Fund (ESF). mutual fund industry.
Dodd-Frank prohibits §13(3) lending to
Provided liquidity facilities for both specific insolvent borrowers and requires “broad-
Federal Reserve Act §13(3) lending institutions (e.g., AIG, Bear Stearns) and based” program eligibility. A program
financing markets (e.g., CPFF, TALF). structured for a single and specific company is
prohibited.
Open bank assistance and guarantees not
Provided open bank assistance, including
permitted except for widely-available guarantee
the use of federal guarantees on asset pools
FDIC Systemic Risk Determination programs pursuant to “Liquidity Event
and bank debt to support term unsecured
Determination,” which require joint resolution of
financing.
approval by Congress.
… and many of the key crisis response programs are being wound down.
Program Description Expiration
Up to $700 billion troubled asset purchase
Troubled Asset Relief Program (TARP) TARP purchase authority terminated in 2010.
authority to support financial system.
Provided authority to purchase GSE
HERA purchase authority terminated at end
Housing and Economic Recovery Act (HERA) obligations and securities to support GSEs
of 2009.
and the housing market.
Provided federal guarantees on nearly $350
TLGP guarantees on bank debt will expire at
FDIC Bank Debt Guarantee Program (TLGP) billion of bank debt to support term
the end of 2012.
unsecured financing during the crisis.
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7. New Tools to Mitigate Financial Threats
A SAFER
FINANCIAL
SYSTEM
Meanwhile, Wall Street Reform gave regulators new powers to support financial stability, so that
taxpayers do not bear the burden of the firms’ mistakes.
Pre-Crisis Post-Wall Street Reform
Banks were required to effectively meet a Tier 1 Today, the largest, most complex banks and designated
capital standard of 6% of their risk-weighted nonbanks will be required to hold up to 9.5% of their risk-
Capital assets, without a clearly-defined amount of weighted assets in the form of higher-quality Tier 1 common
higher-quality common equity. equity.
M&A Limits In addition, no financial firm can grow through acquisition in
10% nationwide deposit limit.
on Size excess of 10% of all financial firm liabilities.
Ability to subject any nonbank financial firm whose failure
Supervision of Voluntary SEC program for supervising securities
could pose a threat to U.S. financial stability to enhanced
Nonbanks firms on a consolidated basis.
supervision.
Lending limits for banks (not including derivative Exposure limits on largest bank holding companies and
Counterparty Limits exposures). designated nonbanks across all types of exposures.
Securities Activity Volcker Rule prohibits proprietary trading by banks and their
Limits only on certain holdings of banks.
Limits affiliates.
Mandatory central clearing, exchange trading and trade
A largely unregulated derivatives market lacked
reporting improve transparency and risk management. New
Derivatives transparency and posed significant risk
capital and margin requirements makes derivatives trading
management challenges for firms and regulators.
safer.
Firms must submit living wills documenting how they will be
Resolution wound down without leaving taxpayers on the hook.
Limited ability to wind down systemically
Authority and Living important financial institutions.
Regulators have new authorities to wind down systemically
important financial institutions without putting the economy
Wills
or taxpayers at risk.
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8. CONCENTRATION
IN CONTEXT
A Consolidating Banking Industry I
The U.S. banking industry has been consolidating at roughly the same pace over the last few
decades, even after factoring in that several large banks acquired weaker competitors during
the financial crisis.
Total Assets of the Four Largest
PERCENT OF U.S. Depository Institutions TRILLIONS OF
INDUSTRY ASSETS U.S. DOLLARS
45% 41% 7
The financial crisis did
not significantly affect
the long-term pace of
bank consolidation. 6
$5.7T
5
30%
Assets as a 4
21%
Share of the
Industry
(left axis)
3
15% 12%
$1.6T
2
$0.6T 1
Assets
in Dollars 2001 2007-09
(right axis) RECESSION RECESSION
0% -
1994
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
SOURCE: SNL FINANCIAL, FEDERAL RESERVE, FDIC, IMF, BANKSCOPE, EUROSTAT, Y-9 BHC.
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9. CONCENTRATION
IN CONTEXT
A Consolidating Banking Industry II
However, the United States is among the least concentrated banking system of any major
economy and among the smallest banking system relative to the size of its economy.
Bank Concentration, 2011*
100% Sweden Netherlands
Belgium
Switzerland
Switzerland
TOP 4 BANKS AS A PERCENT OF TOTAL
80% Italy
Canada
Germany France
BANKING ASSETS
60% U.K.
Japan
40%
U.S.
20%
0%
0% 100% 200% 300% 400% 500%
TOP 4 BANKS AS A PERCENT OF GDP
* NOTE: THESE NUMBERS REFLECT LOCAL ACCOUNTING CONVENTIONS
(E.G., U.S. GAAP, IFRS) AND THEREFORE MAY NOT BE DIRECTLY COMPARABLE.
SOURCE: SNL FINANCIAL, FEDERAL RESERVE, FDIC, IMF, BANKSCOPE, Y-9 BHC.
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10. CONCENTRATION
IN CONTEXT
Credit Sources in International Context
The United States has a diversified financial system that is less dependent on banks as a source
of credit than in many other countries. Here, markets play a much larger role, which means
businesses and families are less reliant on large institutions to provide financing.
Where Does Credit Come From in Different Countries?
0%
10%
25% 22%
32% 14%
Euro
U.S. 6%
Zone
U.K.
59%
13%
11% 76%
32%
Bank Loans The U.K. and the
In the U.S., banks Euro Zone are far
provide only a more dependent on
quarter of the
Capital Markets
their banks for
credit, with the credit.
rest coming from Money Market Funds
outside the
banking system. Corporate Bonds
SOURCE: TREASURY ANALYSIS AND JPMORGAN.
9

11. MARKET
RESPONSE
Distinguishing Financial Firms I
If investors still perceived large banks as “too-big-to-fail,” we would expect to see persistently
low credit spreads with little variation between firms. But in the aftermath of the crisis,
investors are increasingly distinguishing between financial institutions, as measured by a wider
variance in their credit default swap (CDS) spreads that markets use to assess credit risk.
Large U.S. Bank 5-Year CDS Spreads
1100
1000
900
Large bank stress
5-YEAR CDS SPREAD (BPS)
500 test results
Lehman Bros.
bankruptcy Greek, Irish, and
400 Portuguese
AVERAGE spreads spike
300
RANGE BETWEEN
200 MIN & MAX
100
0
Jan '05 Jan '06 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12
PRE-CRISIS POST-CRISIS
Before the crisis, there was little differentiation between the After the crisis, there was significant differentiation between
CDS spreads of large financial firms and low responsiveness the CDS spreads of large financial firms and higher
to external events. responsiveness to external events.
NOTE: INCLUDES BANK OF AMERICA, CITIGROUP, GOLDMAN SACHS, JPMORGAN, MORGAN STANLEY, WELLS FARGO.
SOURCE: BLOOMBERG.
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12. MARKET
RESPONSE
Distinguishing Financial Firms II
If investors perceived large banks as “too-big-to-fail,” we would expect their borrowing costs to
be low and vary little by the size of the institution or its activities. That was the case before the
crisis. But today, bank borrowing costs have increased significantly for the largest, most
complex institutions.
Large and Regional U.S. Bank Five-Year Funding Spreads
230
In the wake of the financial crisis, borrowing
costs for large banks have risen far more
than for smaller, regional banks.
170
2012 AVG
140 140
2012 AVG 110 110
+84 bps
100
+23 bps
85 85
2006 AVG 73 75 75
69 70
61 62 60 63 2006 AVG
55 57
Pre-crisis
(June 2006)
Bank of Citigroup Goldman JPMorgan Morgan Wells Fargo Fifth Third PNC KeyCorp SunTrust
America Sachs Stanley Post-crisis
(September 2012)
LARGE BANKS REGIONAL BANKS
SOURCE: BLOOMBERG AND TREASURY DEPARTMENT ANALYSIS.
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