N.Y. Fed: Large Bank Holding Companies’ Risk Profiles Decline

Since the financial crisis, large bank holding companies have seen notable declines in key risk factors, with several risk indicators near or below pre-crisis levels, according to researchers at the Federal Reserve Bank of New York. The researchers studied BHCs with more than $25 billion in assets over the period of 2000 to 2018.

Idiosyncratic risk—measured by the ratio of return on assets plus average equity ratio relative to the standard deviation of return on assets—is at its lowest levels during the study period, the researchers found. Systematic risk, which is the component of total risk not diversifiable relative to the stock market, declined after 2012 and today remains slightly elevated above pre-crisis levels. And systemic risk, which captures the expected capital shortfall of a BHC should the stock market decline 40%, has remained stable for banks with under $250 billion in assets and returned to pre-crisis levels for larger BHCs.

Meanwhile, after spiking during the financial crisis, liquidity risk has been more volatile in some years, with BHCs appearing “more sensitive to liquidity risks triggered by general stress in funding markets,” the researchers said.