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Why Are Some Banks Too Big To Fail?

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An overview of America's eight too big to fail banks.

Published in: Economy & Finance, Business

Why Are Some Banks Too Big To Fail?

  1. Too Big To Fail Banks AN INTRODUCTION
  2. Strictly speaking, there’s no such thing as a too big to fail bank. They’re known instead as global systematically important banks, or GSIBs.
  3. Right now, there are eight GSIBs, ranging in size from $245 billion in assets up to $2.4 trillion. $2.4T $2.1T $1.8T $1.7T $861B $788B $394B $245B JPMorgan Chase B of A Wells Fargo Citigroup Goldman Sachs Morgan Stanley BONY State Street
  4. Four are commercial banks: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. $2.4T $2.1T $1.8T $1.7T JPMorgan Chase B of A Wells Fargo Citigroup Goldman Sachs Morgan Stanley BONY State Street
  5. Two are investment banks: Goldman Sachs and Morgan Stanley. $861B $788B JPMorgan Chase B of A Wells Fargo Citigroup Goldman Sachs Morgan Stanley BONY State Street
  6. And two are custodial banks: The Bank of New York Mellon and State Street. $394B $245B JPMorgan Chase B of A Wells Fargo Citigroup Goldman Sachs Morgan Stanley BONY State Street
  7. While all of these banks are among the biggest in America, size isn’t the only determinant. The Bank of New York Mellon and State Street, for example, have smaller balance sheets than non-GSIB U.S. Bancorp. JPM BAC WFC C GS MS BK STT USB PNC COF BBT STI AXP ALLY FITB CFG RF MTB NTRS KEY G-SIBs Regional Banks
  8. These banks’ role in the global financial system is just as important -- which is why they’re called global systematically important banks.
  9. What makes The Bank of New York Mellon and State Street systematically important is the fact that they oversee a combined $60 TRILLION worth of client assets.
  10. There are 3 main consequences that come with GSIB status – none of which is good from the perspective of an investor in these firms.
  11. First, GSIBs are subject to heightened regulatory scrutiny, which includes annual stress tests that assess whether or not these banks have enough capital to survive a future downturn akin to the financial crisis.
  12. Second, GSIBs can’t increase their dividends or stock buybacks without the Federal Reserve’s approval in the annual comprehensive capital analysis and review, or CCAR.
  13. Third, GSIBs can’t use as much leverage as their smaller counterparts, which weighs heavily on a GSIB’s profitability. PROFITABILITY LEVERAGE
  14. The net result is that GSIBs, holding all else equal, are no longer able to compete on a level playing field against the likes of U.S. Bancorp and M&T Bank, among others.
  15. At the same time, however, it’s safe to say that the heightened regulatory scrutiny of GSIBs has made the financial system safer.
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