Senator Elizabeth Warren, hurry, We can't wait for them to do the right thing!
U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk
By Yalman Onaran - Feb 19, 2013 7:01 PM ET
Warning: Banks in the U.S. are bigger than they appear.
That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg.
“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”
U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books.
That can underestimate the risks firms face and affect how much capital they need.
Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.
World’s Largest
JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show.
Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.
U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.
Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds.
Derivatives are financial contracts whose value depends on stocks, bonds, currencies or other securities. Because two parties agree to swap cash or collateral at the end of a pre- determined period, that value also depends on the existence of the counterparty when it’s time to pay.
more:
http://www.bloomberg.com/news/2013-02-20/u-s-banks-bigger-than-gdp-as-accounting-rift-masks-risk.html
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