The Fed's Re-examines "Too Big to Fail"

As the market waits for the Fed's statement summing up its rate-setting meeting, expected at 2 p.m. EDT, U.S. stocks are roughly unchanged this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up slightly at 10:10 a.m. EDT.

Risk-weighted or risk-prone?
Is the Fed finally getting tough on too-big-to-fail banks? As political pressure to address the issue of banks that pose a systemic risk to financial markets and the economy mounts -- "TBTF" has not been properly addressed by Dodd-Frank -- the central bank is now considering raising the floor on the equity-capital-to-total-assets ratio above the 3% mandated under the new Basel 3 international standards.

At issue is whether so-called "risk-weighted" assets are an appropriate measure of the size and risk of a bank's balance sheet. Under this framework, different types of assets, from Treasury bonds to corporate loans, are assigned weightings, according to their risk. This ultimately lowers total asset figures, as the following table demonstrates:


Total Risk-Weighted Assets, Basel 3 as of March 31, 2012

Total Assets as of March 31, 2012

Bank of America (NYSE: BAC  )

$1.388 trillion

$2.212 trillion

Citigroup (NYSE: C  )

$1.449 trillion*

$1.944 trillion

Source: Company documents *Base 2.5, estimated.

The concern of some politicians and analysts is that risk-weighted asset calculations depend on banks' internal risk models and assumptions that could allow banks to game the system by producing figures that understate the true risk of the bank. The 3% minimum ratio is based on total assets (unweighted), which cuts through this problem; unfortunately, the more prominent ratios cited under Basel 3 are based on risk-weighted numbers.

I've long written that the TBTF banks' capital requirements are insufficient. It's good to see that the Fed -- their main regulator -- is beginning to look at this problem more closely.

Is B of A a buy?
Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu and Matt Koppenheffer lift the veil on the bank's operations, detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2400225, ~/Articles/ArticleHandler.aspx, 9/26/2016 12:02:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
^GSPC $2164.69 Down -12.49 -0.57%
S&P 500 INDEX CAPS Rating: No stars
BAC $15.52 Down -0.08 -0.51%
Bank of America CAPS Rating: ****
C $47.15 Up +0.04 +0.08%
Citigroup CAPS Rating: ***