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Fitch: US G-SIB Data Highlights Payment, Custody Concentrations
April 22, 2014 / 4:56 PM / 4 years ago

Fitch: US G-SIB Data Highlights Payment, Custody Concentrations

(The following statement was released by the rating agency) NEW YORK, April 22 (Fitch) Payments and custody are two areas where concentration is highest, according to Fitch Ratings' analysis of systemic risk data from eight US global systemically important banks (G-SIB). The concentration carries a high degree of potential systemic risk and supports the requirement for G-SIBs to hold additional capital buffers. It also highlights the importance of developing an effective resolution framework for such large and complex institutions. The concentration highlights the challenges regulators face with resolving banks that are "too big to fail." Seventy-eight percent of total payment activity among the eight G-SIBs was carried out by three firms -- JP Morgan, Citi and BNY Mellon -- according to systemic risk reports (FR Y-15) for year-end 2012 filed with the Fed in December 2013. Custody services are also highly concentrated, with BNY Mellon, State Street and JP Morgan holding 81% of custody assets. The lack of substitutes, if a dominant market participant and client service provider fails, could disrupt financial markets. Part of the reason for the marked concentration is because some US G-SIBs are not active in payment or custody activity; for example, Goldman and Morgan Stanley do not focus on these businesses. Other data points from the systemic risk reports are less concentrated, with the top three participants taking 55% to 69% of the share among the eight G-SIBs. JP Morgan is one of two banks globally subject to a 2.5% G-SIB capital buffer, the highest level designated since no firm has been assigned the maximum 3.5% bucket. The group ranked top for most of the indicators for size, interconnectedness, substitutability and complexity among the eight US G-SIBs and was second only to Citi for cross-jurisdictional activity. These are the five key factors assessed in the Basel committee's methodology. Citi was moved down to a 2% capital buffer in the November 2013 G-SIB list and ranks second or third in most indicators among the eight US banks. Unsurprisingly the global footprint of the bank is the widest, as it has the largest amounts of foreign claims and cross-jurisdictional liabilities. Although Goldman and Morgan Stanley are smaller in size, their global interconnectedness, complexity and role in underwriting puts them in the 1.5% bucket, together with Bank of America. BNY Mellon and State Street are in the lowest G-SIB category with a 1% buffer largely due to dominant roles in custody, but are not as complex, interconnected or large as the other US G-SIBS. Wells Fargo is also in this lowest bucket 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. To date, the US has not formally designated any domestic systemically important banks. But these are likely to include the eight G-SIBs. The dominance, complexity and interconnectedness of US G-SIBS partly underpin our assessment of continuing support for these firms. Our view also factors in the hurdles that remain to implement the Orderly Liquidation Authority under the Dodd-Frank Act. These include how cross-border derivative acceleration and termination provisions are handled in a resolution. There also has to be sufficient contingent capital at the holding company to recapitalize without requiring government assistance, as envisaged in the single point of entry resolution model favored in the US. But we believe there is clear intent to reduce support for G-SIBs in the US and sufficient regulatory progress continues to be made. Therefore, we expect a material weakening of sovereign support propensity within the next one to two years. Contact: Christopher Wolfe Managing Director Financial Institutions +1-212-908-0771 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Sovereign Support For Banks: Rating Path Expectations here U.S. Bank HoldCos & OpCos: Evolving Risk Profiles here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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