WASHINGTON–A new study suggests that asset size alone is an incomplete measure of potential risks banks pose to the economy.
Currently, the Dodd Frank Act mandates that banks holding $50 billion or more in assets are subject to additional layers of regulation or Enhanced Prudential Standards (EPS). But findings in the new report from the Financial Services Roundtable, “Bank Size vs. Systemic Importance” show a bank’s asset size, by itself, isn’t a reliable indicator of how the financial institution’s failure might impact the economy overall. Instead, other factors, including how a bank behaves in the marketplace, are better risk indicators of possible impact on the larger economy, FSR said, adding that the study also indicates some banks are simply too small to pose a systemic risk to the larger economy.
“The study’s findings suggest the current ‘size-based only’ systemic risk threshold is not sufficiently comprehensive to properly assess risk to the U.S. financial system overall. In determining overall risk, numerous factors, in addition to just asset size, should be considered. U.S. policymakers should re-examine their approach to these important decisions,” said FSR President and CEO Tim Pawlenty.
FSR is proposing that a “multi-factor” approach be used, which would consider additional factors such as a bank’s behavior in the marketplace, its business model, interconnectedness to other banks and key parts of the economy – in addition to the bank’s size.
The study, performed by the Boston-based firm Aite Group, used financial data from SEC filings to compare the systemic importance of U.S. banks ranging from $20 billion to over $2.5 trillion in assets. The data show a clear disconnect between practices that increase systemic risk and the asset size of the bank. In addition, the study’s model showed that certain smaller institutions displayed the same level of systemic risk as certain larger banks – but that failure of a smaller bank would not have a systemic impact on the $18-trillion U.S. economy.