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Here's Why State Street Is More Systematically Important Than Capital One and PNC Financial

By John Maxfield - Jan 29, 2016 at 10:20AM

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You won't hear either of these regional banks complaining about it, but it's nevertheless an interesting question given that both of them have bigger balance sheets than State Street.

Data source: 4Q15 earnings releases.

There are eight global systematically important banks (GSIBs) in the United States, the smallest of which is State Street (STT 1.93%). Meanwhile, a handful of regional banks with significantly bigger balance sheets than the $245 billion Boston-based firm, don't make the cut, including Capital One Financial and PNC Financial. What explains this?

In short, there's more to be being deemed a "too big to fail" bank (which, if we're going to be honest with ourselves, is what GSIBs are) than just the size of a bank's balance sheet. You can get a sense for this in the chart above, which shows the domestic banks that must submit to the Federal Reserve's annual stress test.

There are three regional banks with more assets on their balance sheets than State Street: $422 billion U.S. Bancorp, $359 billion PNC Financial, and $334 billion Capital One. Yet I think it's fair to say that none of these would get the same amount of government support in the unlikely event that they needed to be grasped from the jaws of insolvency.

One reason probably stems from the fact that a bigger institution could step in to rescue them if it was absolutely necessary to do so. JPMorgan Chase did this twice in the financial crisis, buying Bear Stearns in March 2008 and then $307 billion Washington Mutual in September, albeit immediately after the latter had been seized by the FDIC. Wells Fargo followed suit in the next week by acquiring $310 billion Wachovia.

But even more importantly, the reason that State Street makes the cut is because it oversees a vast portfolio of assets under custody and management. The tally added up to just under $30 trillion at the end of last year. That's trillion, not billion. The only other bank in its league is The Bank of New York Mellon, which is one of the reasons I've called the New York City-based asset manager the most interesting bank in America.

The Bank of New York Mellon CEO Gerald Hassell. Image credit The Bank of New York Mellon.

Both State Street and The Bank of New York Mellon play unique and especially important roles in the global financial system by administering a combined $60 trillion in assets for institutional investors. By doing so, these firms provide much of the infrastructure that underlies the fixed-income markets. If there is such a thing as the epicenter of global finance, in other words, both of these banks are positioned directly on it.

It's for this reason that State Street, and for that matter The Bank of New York Mellon as well, are classified as global systematically important financial institutions while PNC Financial and Capital One are not.

John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo and has the following options: short March 2016 $52 puts. 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.

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