I read yesterday that the International Monetary Fund has identified 3 banks as posing the greatest global systemic risks:
Friedrich Geiger and Ryan Tracy (2016, July 1). Worries Grow at Two Big Banks. The Wall Street Journal, C1.I wanted to understand the criteria used by the IMF to evaluate risk. A Google search revealed this IMF document, a technical note on how the US financial sector was evaluated:
The IMF said that ‘among the [globally systemic important banks], Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse”…
… “The International Monetary Fund called the German Bank [Deutsche Bank] the riskiest financial institution in the world as a potential source of external shocks to the financial system. That labeling came right after a US banking unit of Deutsche Bank was one of just two banks to fail the Federal Reserves’ ‘stress test,’ an exercise measuring how 33 banks would fare in the event of another financial crisis…
UNITED STATES FINANCIAL SECTOR ASSESSMENT PROGRAM STRESS TESTING—TECHNICAL NOTE. June 2015. International Monetary Fund. Washington DC https://www.imf.org/external/pubs/ft/scr/2015/cr15173.pdf
This Technical Note was prepared in the context of an IMF Financial Sector Assessment Program (FSAP) mission to the United States of America, led by Aditya Narain and overseen by the Monetary and Capital Markets Department, IMF.This document provides background information on how the stress tests were conducted in the US.
It reveals how risk is constructed in the stress tests and discloses important data about the concentration of wealth in a few financial institutions.
First of all, risk is constructed in terms of banking vulnerabilities, in relation to bank capacities to sustain:
abrupt market volatility,As documented by the IMF Appendix I. Risk Assessment Matrix and Stress Test Matrix, page 97.
imbalances from protracted periods of low interest rates
protracted periods of slower growth
bond market stress
So what is prioritized is bank health. Bank health in an institutional context of highly centralized ownership and power, as revealed quite clearly on page 12 of the IMF's Technical Note:
The stress test covered 31 largest BHCs [Bank Holding Companies] (with total consolidated assets of $50 billion and more), which account for about 85 percent of the BHC assets and 70 percent of total banking sector assets, defined as total assets of BHCs, savings and loans holding companies (SLHC) and commercial and savings banks that are not part of any BHC or SLHC (Figure 1).Did you get that? Six largest US Bank Holding Companies control 52 percent of TOTAL US bank holding company assets.
The network analysis was based on six largest BHCs, accounting for 52 percent of total BHC assets.
And 31 US Bank Holding Companies have total consolidated assets of $50 billion and more, which account for about 85 percent of the US BHC assets and 70 percent of total banking sector assets.
There is a diagram on page 13:
Instead of evaluating risks to this clearly problematic system of ownership and decision-making, the IMF should analyze risks from banks:
Risks to the global population from the banks' exploitation of wealth and resources
Risks to the eco-system
Risks to climate
Risks to human sustainability
These criteria rather than the health of a highly consolidated and risk-oriented financial system should constitute the criteria used when evaluating systemic risks.