JPMorgan May Be Less Risky But the Finance System Isn’t

For the first time in three years, JPMorgan Chase & Co. is not the world’s most systemically important bank. The Wall Street giant slipped down a notch in the global assessment of the riskiest lenders — one of the few rankings where banks are eager to see themselves drop. There was good news for Goldman Sachs Group Inc., too, which was also deemed less risky than it was a year ago by the Financial Stability Board.

However, any relief that the world’s banking and financial systems have become more resilient would be misplaced. The trillions injected into markets this year by central banks and governments have fanned an explosion of banking activities that’s yet to be captured by the FSB’s risk metrics.

JPMorgan will no longer be alone in having to set aside an extra capital buffer of 2.5% to reflect its perceived riskiness. Instead, it will join Citigroup Inc. and HSBC Holdings Plc in the 2% band.

Of the 30 banks measured by the FSB, only one — China Construction Bank Corp. — went up a level; it will have to set aside 1.5%. All of the other firms, from Britain’s Barclays Plc to Switzerland’s UBS Group AG, were unchanged in having to provide an extra buffer of 1.5% or 1%. The more capital banks have to put aside, the higher their cost of doing business. No wonder Deutsche Bank AG was flagging its relegation months before it happened last year.

There are concerns that the FSB’s metrics are too blunt and too high level to capture the dangers properly, but the bigger problem is that they’re based on data from almost a year ago: December 2019. Since then, banks’ balance sheets — and their riskiness — have been transformed by the huge market dislocations during the pandemic, the surge in corporate borrowing and the record pace of securities sales. Some will have expanded more than others, while the hit from bad loans will take years to work its way through the system.

The gross global value of over-the-counter derivatives is one sign of how many riskier assets are now sloshing around the financial system: They rose 24% in the first half of 2020 to $15.5 trillion, according to the Bank for International Settlements. At the same time the value of lenders’ hardest-to-value assets, known as Level 3, surged more than 20% in the first six months of the year, my Bloomberg News colleagues have calculated. At Citi and Societe Generale SA, Level 3 assets rose more than 50%.

Elsewhere, the underwriting of stocks and bonds — another activity measured by the BIS — has soared as companies have refinanced loans. Lending, not all of it guaranteed by governments, has swollen some banks’ balance sheets.

JPMorgan reported a 20% jump in assets in the first nine months of 2020 compared with the same period last year, as commercial loans and derivative assets rose. Assets at Citi increased 15%; at HSBC they rose by about 9%. A lot has changed since December 2019. 

The world’s economies, on the other hand, have shrunk dramatically, with no certainty about how long they’ll take to recover from the pandemic lockdowns. Even where risk has moved outside the regulated banking sector, increased links between lenders and non-bank financial companies (which include insurance groups, investment funds and the like) “may lead to larger-scale distress,” the International Monetary Fund warned last month.

U.S. regulators are running a fresh round of stress tests on their banks, and the Europeans will follow next year. Those should provide a clearer sense for where the vulnerabilities may lie. It would be dangerous for supervisors to use the FSB’s annual risk assessment to deem banks safer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2020 Bloomberg L.P.

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