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The Top 10 Riskiest Financial Institutions

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As a result of the financial collapse that took our country by storm in 2008, Congress ordered bank regulators to identify the riskiest companies so they can be more tightly supervised. This is no laughing matter -- the largest six banks in the U.S. had assets valued at 64% of GDP at the end of Q3 2010; that number was just 55% at the end of 2006 and only 17.1% in 1995.

This spring, the Fed, the Treasury Department, and nine other regulators on the Financial Stability Oversight Council will reveal the criteria they're using to decide which companies are in fact systemically risky. The companies will be named later in the year.

In the meantime, however, NYU's Stern School of Business has come up with its own test, led by Nobel Prize winner Robert Engle. The model takes a firm's stock price as a replacement for its capital, and then subjects each company to a stress test, indicated by a 40% drop in the overall stock market. The hope is that this will reveal how much capital a company would need to hold in such a dire situation. The results of the Stern Systemic Risk Contribution (SRISK) are outlined below:

  1. Bank of America (NYSE: BAC  ) : 25% SRISK. This is America's largest bank, with $2.3 trillion in assets and a leverage ratio of 7.2%.
  2. JPMorgan Chase (NYSE: JPM  ) : 12% SRISK. This is the second-largest bank by assets; it has a leverage ratio of 7.1%. The NYU model illustrates that JPMorgan's market value would fall by 5% if the stock market declined by 2%.
  3. Morgan Stanley: 12% SRISK. Morgan Stanley has a leverage ratio of only 6.6% (at the end of last June). However, according to the NYU model, every $22 of assets sits atop $1 of stock market value.
  4. Citigroup (NYSE: C  ) : 12% SRISK. This is the third-largest bank with about $2 trillion in assets and a leverage ratio of 6.6%.
  5. Goldman Sachs (NYSE: GS  ) : 10% SRISK. Similar to JPMorgan, the study shows that Goldman's stock would drop by 5% if the overall market declined by 2%. Goldman has an 8% leverage ratio (as of June).
  6. Metlife: 6% SRISK. Worse than Goldman, the model shows that this insurer would lose about 6% of its value if the market dropped by 2%.
  7. Prudential Financial (NYSE: PRU  ) : 6% SRISK. The NYU model illustrates that the company has $33 of assets for each $1 of stock market value, making it vulnerable to shocks in the stock market.
  8. Sallie Mae: 3% SRISK. This has the highest leverage in the NYU model, with almost $38 dollars of assets for each $1 in stock market value.
  9. Hartford Financial Services (NYSE: HIG  ) : 3% SRISK. Hartford has $28 in assets for every $1 in stock market value.
  10. Wells Fargo (NYSE: WFC  ) : 2% SRISK. This is the fourth-largest bank in the U.S. with $1.2 trillion in assets. The systemic risk is less because, according to the model, Wells has more of a capital buffer that should protect it from a market downfall.

What do you think as an investor: Which financial institution would you feel most comfortable with if the stock market declined drastically? Sound off in the comments below or add any of these companies to your Watchlist to get the latest analysis and commentary.

Jordan DiPietro owns no shares mentioned above. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2011, at 3:59 PM, pondee619 wrote:

    "The model takes a firm's stock price as a replacement for its capital,"

    So the more grossly overpriced a companys stock is the healthier the company? The cheaper a companys stock is the less healthy the company?

  • Report this Comment On February 07, 2011, at 4:30 PM, thefoolkiller wrote:

    Another incredibly poorly written article by you fools. You pretty much don't explain anything here. If a 2% stock market decline means a 5% decline in a bank's stock, does that imply a 40% decline in the market makes the stock zero value? And what is the study's basis for this type of conclusion. What does 25% or 12% SRisk even mean? You point out ratios of assets to stock price for some of the banks (the riskier ones?)--does this imply that others like Citi do not have this high "leverage." (show consistent statistics if you are going to compare and rank risk). Just way too many unanswered (and probably not understood) questions in this half-baked article.

  • Report this Comment On February 07, 2011, at 11:49 PM, TraderHW wrote:

    I have to agree, poorly written and non-conclusive, and half complete.

    If you want to read good research that explains what is going on in the economy and uncovers the truth check out the Capital Research Institute

    Manipulation of Government Data

    "...The reason for the manipulation of the GDP deflator is clear, because without changing it from 2.0% to 0.3% would mean that the GDP growth of 3.2% was actually closer to 1.5% during the 4th quarter. Let’s assume for a second that the Consumer Price Index (CPI) for the 4th quarter of 1.3% is correct (which as we know is also understated), then the GDP data understates inflation by 1% and thus GPD growth based on the CPI was at best 2.2%. Most people put a lot of trust in the government to tell them the truth about the state of the economy so that each individual can properly prepare for what is to come, but when data is manipulated to give people a false feeling that everything is alright while it clearly isn’t, is a crime. These results all should be audited by third party auditors in order to keep the bureaucrats at least to some degree honest."

  • Report this Comment On February 08, 2011, at 3:47 PM, mikecart1 wrote:

    SRISK = worst investing statistic ever created

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