Measurement of Assets Push Banks To $14.7 Trillion
This disparity emanates from less stringent U.S. accounting standards than international ones for measuring assets. According to this estimate, the big four among U.S. banks – JP Morgan Chase, Wells Fargo, Citigroup, and Bank of America – are bigger than the U.S. economy.
By international standards, the aforementioned banks tag at 93% of the U.S. GDP or $14.7 trillion, reports Bloomberg News. This figure stands lower at $7.8 trillion in assets, representing a U.S. reading in The Huffington Post. One of the issues at stake is that the U.S. gauge can mask risk. However, the recent financial downturn in the economy proved that mortgage debts are likely to be a considerable risk during a financial crisis.
Derivatives May Lead to High Lending Risk
U.S. banking regulations permit banks to show a smaller percent of ‘derivatives’ than European counterparts. This maintains mortgage-linked bonds off the balance sheets in the U.S. Derivatives refer to securities contracts that involve currencies, bonds and stocks.
Derivatives, and other assets off the balance sheets, played an important role in the credit crunch leading to the recession. These off the books mortgage securities wreaked havoc on banks when they had to repurchase loans on homes purchased by special investment vehicles. The American International Group Inc. was one insurer that was bailed out by the U.S. government when it failed to shore up payments to banks on derivatives.
According to a recent survey by auditing firm Deloitte, 88 percent of 70 international banks responded that they do not foresee international convergence on regulation linked to derivatives, balance sheets, lenders or reserves for loan losses.
The concerns about the economy that trail the media reports is that some of the risks related to banks are still hidden from investors and regulators. At the heart of the issue is that banks look at derivatives as ‘fuzzy logic’ or as an ambiguous entity. Big banks typically take the stand that counting all their derivatives is an unfair practice.
Analysts say that, on average, these special vehicle contracts will cancel out and bring down the net risk for banks. Another problem with comparing bank assets, collecting profits or losses versus GDP, the movement of money through the U.S. economy is somewhat contrasting.
Seeking Consensus on Bank Rules
So far, there has been no concurrence on banking regulations in the U.S. One recent proposal recommended that banks should warehouse data about losses over the entire span of a loan. Lenders opposed the idea citing it would force them to store more reserves, causing a dip in profits compared to European peers.