An analysis of systemic risk data from the eight U.S. banks that have been deemed global systemically important banks (GSIBs), finds that payments and custody are the two areas where concentration is highest and systemic risk is substantial.
According to Fitch Ratings’ analysis, the level of concentration in the payments and custody businesses carries a high degree of potential systemic risk, and supports the requirement for these banks to hold additional capital. It also highlights the importance of developing an effective resolution framework for such large and complex institutions, it says, noting that the level of concentration in these areas highlights the challenges regulators face with resolving banks that are “too big to fail.”
“We believe there is clear intent to reduce support for GSIBs in the U.S. and sufficient regulatory progress continues to be made,” it says. “Therefore, we expect a material weakening of sovereign support propensity within the next one to two years.”
Fitch reports that 78% of total payment activity in 2012 was carried out by three firms — JP Morgan, Citi and BNY Mellon. Custody services are also highly concentrated, with BNY Mellon, State Street and JP Morgan holding 81% of custody assets, it says. Part of the reason for the heavy concentration in these areas is because some of the U.S. GSIBs are not active in these areas, Fitch notes. “The lack of substitutes, if a dominant market participant and client service provider fails, could disrupt financial markets,” it says.
Currently, JP Morgan is one of only two global banks subject to a 2.5% capital buffer under the GSIB regime, Fitch notes. Citi must hold a 2% buffer; Goldman, Morgan Stanley, and Bank of America, are in the 1.5% bucket; whereas BNY Mellon and State Street are in the lowest category, with a 1% buffer largely due to their dominant roles in custody, although they are not as complex, interconnected or large as the other firms. Wells Fargo is also in the lowest category, which Fitch says is probably due to its size and significant deposit market share, although it is domestically focused with relatively limited overseas activity and ranks lower in complexity and interconnectedness.
So far, the U.S. has not formally designated any banks as domestic systemically important banks. But, Fitch says that this is likely to include the eight GSIBs.