The Taser and the choke lead: How the Fed restrains big banks

9 August 2016/No Comments
By Nick Dunbar
  • Large US banks hold a significantly higher proportion of operational risk capital compared with their European peers
  • The Federal Reserve uses the Basel standardised approach in its annual stress tests, testing operational risk events within its market and credit risk scenarios
  • Applying the advanced approach to the stress tests would force the Fed to justify the level of op risk RWAs it currently requires banks to hold

If there is one metric that differentiates big American banks from their European peers, it is the amount of regulatory capital they hold against operational risk. On both an absolute level and scaled by common equity tier 1 capital, the US banks are ahead, with the top five having average op risk regulatory capital at 18.2% of CET1 capital, versus 10.8% in Europe. That amounts to a total US regulatory capital premium of about $47 billion for JP Morgan, Citigroup, Bank of America, Goldman and Morgan Stanley combined.

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