Fact and Fiction Behind Too Big to Fail
Are you a bank analyst, or do you know one? I have created a link, below, to a model I built in 2011 after the passage of Dodd-Frank. Based on regulatory filings of the banks on the Fed’s Top Fifty Bank Holding Companies list, mentioned from time to time in my blog posts.
I was curious about the banks’ relative reliance upon the credit rating agencies’ assumption of government support for the biggest and on their exposures to derivatives, which rely upon complex models.
So I built the Excel model that replicates the regulatory capital calculation data and added lines to provide comparisons. Risk-weighted assets, both on balance sheet and off. Risk-weighted derivatives as a percentage of total risk-weighted assets. The percentages in the various buckets in that year’s filing. You can see what’s there.
It’s an Excel file. I prefer to print to PDF and use that for posts as the data can’t change. If you would like to use this, be my guest. The formulas should work even though you’ll have to populate it with more recent filing data. Perhaps XBRL will make that easier. After my time…
I looked at three groups of six banks. The six at the top, by asset size. The six at the bottom of the 50. And the first six at $50 billion or higher in asset size, i.e. the first six to be deemed “systemic”. Note that this was the year of Dodd-Frank passage. There is one bank whose data I was going to go back and check, but getting the “10 Reasons to Break ‘Em Up” series out was a higher priority. I figured you could do your own comparisons with more recent data.
The worksheets flow from the first, which compares the three groups, followed by the individual banks in the three groups with their averages, to each bank’s separate file. I calculated their capital ratios as a check, as I always try to do along with careful proofing. I once neglected to change millions to billions, but hopefully haven’t done that again. Where’s Tip O’Neil when you need to have a laugh with someone who’d appreciate that?
What I did find for 2010 data was the higher percentage of derivatives among the biggest six and the greater service to lower-rated credits among the other two groups of six. One might feel in one’s gut that since derivatives trading is primarily among the largest to begin with that the percentages should be even higher without the assumption of support, at least in that year — the exposure of the government to the derivatives modeling since these are now deemed systemic.