01 November 2018

Financial Times: US regulator fears ‘homogeneity’ of large banks

Kevin Stiroh, head of supervision at the New York Federal Reserve, said: “If firms expand, diversify and become more similar, each might become safer individually [but] if all firms are effectively the same they could become systemic as a herd and susceptible to the same shocks in a way that leaves the aggregate provision of financial services more volatile.”

Mr Stiroh said the regulator’s work on the topic was at a relatively early stage but was of vital importance, as worries grow that the economic cycle may turn, putting more pressure on banks’ balance sheets.

Over recent months Goldman Sachs has stepped up its ambitions as a deposit-taking institution, using its Marcus digital platform to attract close to $30bn of consumer deposits. The move to become an all-encompassing universal bank signals a clear shift away from its previous sharp focus on investment banking. Other institutions with more of a lending heritage have been expanding their investment banking operations.

Mr Stiroh said the regulator’s thinking on the topic had been informed by studying academic research and analysing the “balance sheets, correlation of market returns over time and the organisational structure of firms as measured by the types of subsidiary they have and the industry classifications in which they operate”.

He suggested the most significant driver of banks’ growing similarity was rooted in regulatory initiatives introduced following the 2008 crisis, which sought to restrict total balance sheet risks, via leverage ratio requirements, and toughen capital demands as a proportion of assets weighted for risk. Depending on whether it is the leverage ratio or the risk-weighted capital requirement that proves the “binding constraint” on a bank’s operations in a certain area, it was likely to incentivise an expansion of certain types of business, pushing banks to do the same thing, Mr Stiroh said.

Another powerful driver of homogeneity had been the last decade’s unconventional monetary policy, he said. All banks had to respond — via diversified expansion — as ultra-low interest rates put pressure on margins.

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