HPS Insight

The Dodd-Frank Act: Goals and Progress

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By Patrick Sims, psims@hamiltonps.com, 202-822-1205

In the midst of the complex and evolving debate surrounding “too-big-to-fail” (TBTF), the approach taken by the largest financial overhaul in U.S. history, Dodd-Frank, has been overlooked in the discussion. Whatever the merits of its approach to solving TBTF, it is worth revisiting what the law actually says and why the different pieces were written.

The goals of the Dodd-Frank Act are to:

1. Reduce the likelihood of an individual firm’s failure.
2. Lower a failure’s cost to the broader economy.
3. Reduce the spread of financial contagion in the event of a future crisis.

While the effectiveness of these approaches are outside the scope of this paper, we detail the many rules designed to meet these three objectives including Orderly Liquidation Authority (OLA), Living Wills, the advent of the Financial Stability Oversight Council (FSOC), and many others. These efforts are far from complete, but as regulators work through Dodd-Frank, it does not make sense to discuss further regulatory efforts without the proper context of all that has …

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April Jobs Day Fact Sheet

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A Comment to Mark Whitehouse’s April 5, 2013 Bloomberg View Article

by Patrick Sims, Director of Research, psims@hamiltonps.com, (202) 822-1205

So Mark Whitehouse hates big banks. We get it.

We disagree with his points, and there is a point-by-point rebuttal below, but this all comes down to one fundamental question: Do large global financial institutions actually provide value in a large global economy?

We would argue that they do.  Nothing that we have seen in the business world presents compelling evidence that small or even regional banks are capable of providing the transaction support, the hedging strategies, the lending facilities, the payment options or the many other financial needs of companies operating on a global scale.

If you think that community banks,  regional banks, or even super-regional banks can perform all of these services, then Mark Whitehouse may be right.  Blow it all up and to hell with the consequences.  But if you think that maybe they can’t, then you really want to try to fix the too-big-to-fail problem through regulatory changes, and that is exactly the process that is underway right now

The …

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March Jobs Day Cheat Sheet

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Point/Counterpoint: Why Senator Brown¹s proposal to cap bank size does not address systemic risk and places Americans at a global disadvantage

By: Patrick Sims, psims@hamiltonps.com, 202-822-1205

When Senator Sherrod Brown (D-OH) discussed his new proposal to break up the largest U.S. banks and place a cap on future growth in a recent interview with Mike Konzecal of Washington Post’s Wonkblog, he misrepresented accounting standards to justify his idea to cap bank size.  And the fact is, his overall proposal does little in the way of reducing systemic risk while placing the U.S. financial sector and the American taxpayer at a permanent disadvantage in the global economy. Below are a key counters to his main points.

Point #1: Smaller banks cannot provide the same services as larger banks

Point: “I have yet to hear why 20 super-regional banks couldn’t do a better job than 11 megabanks that benefit from implicit guarantees from the federal government.”

Counterpoint: It’s a misconception that smaller, regional banks would provide this service in the absence of large U.S. banks.  If they could, they probably would. The syndicated loan market is a perfect example:  In 2012, Wal-Mart received the largest syndicated …

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The Next Stress Test Could Be Real, If So The U.S. Banking Industry Is Ready

By Patrick Sims, 202-822-1205, psims@hamiltonps.com

Yesterday the Federal Reserve released the results of the third annual stress test of the largest U.S. financial institutions.

Actually, it’s the fourth – the first true stress test of the modern financial system was the financial crisis, and we all know how that turned out. As the housing bubble burst, many banks failed. In response, the federal government was forced to take drastic measures to support the economy, in hopes that things didn’t get worse. They did, for a while, but then they got better.

We’ve come a long way since.

But what if we experience another crisis of similar proportion? What if we are hit with the unexpected and unemployment goes to say, 12.1 percent, instead of the 10.2 percent peak of 2009? What if housing prices quickly declined 20 percent, instead of the 18 percent year-over-year decline of 2008? And, what if U.S. GDP and equity markets took drastic hits, while other international economies experienced downturns of their own?

These are the scenarios under …

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February Jobs Day Cheat Sheet

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HPS FDIC Quarterly Banking Profile Preview

By Patrick Sims, psims@hamiltonps.com, 202-822-1205

Click to view the HPS FDIC Quarterly Banking Profile Preview here.

The HPS FDIC Quarterly Banking Profile Preview examines FDIC-regulated entities progress in three key areas: safety and soundness, performance, and support to the economy. In the Q4’12, we find:

• U.S. commercial banks’ Tier One Common Capital Ratio was 12.6 percent as U.S. commercial banks increased common capital levels to $1.13 trillion.
• U.S. commercial bank’s Net Income decreased slightly quarter-over-quarter to $32.26 billion, but is the most profitable year since the crisis on an annual basis.
• U.S. commercial bank’s ROAA and ROAE followed the same pattern as Net Income on both a quarterly and annual basis, and ended the year at 1.02 and 9.08, respectively.
• U.S. commercial banks’ Loan-to-Deposit ratio fell to 70.3 percent, in a large part due to the increase in deposits.
• U.S. commercial banks’ topped $10 trillion in deposits, an all-time high. Total bank deposits rose to near $11 trillion.
• Total reserves fell by three percent to $151 million for U.S. commercial banks; while non-performing

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The Hamilton Financial Index

By Matt McDonald, mmcdonald@hamiltonps.com, 202-822-1205

Read the full report here.

The Hamilton Financial Index (HFI) combines both financial stress, represented by the St. Louis Financial Stress Index, and industry-level capitalization, represented by the Tier One Common Capital ratio, to provide a clear snapshot of the safety and soundness of the financial services sector. The key findings are:

• Currently, the HFI shows that financial institutions are significantly safer today with a score of 1.28, 28 percent higher than historical norms.
• The rise in the HFI reflects growth in capital. If capital levels remained at pre- crisis levels, the HFI would be below pre-crisis norms with a reading of 0.95.
• U.S. banks Tier One Common Capital ratio is 12.6 percent, a year-over-year increase of 1.3 percent.
• U.S. banks Tier One Common Capital increased to $1.13 trillion.
• The ratio of Risk-Weighted Assets to Total Assets fell 1.3 percent year-over-year.
• Financial stress declined in the fourth quarter of 2012.

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McDonald on Bloomberg TV: Dowd, McDonald on Obama’s State of the Union Speech

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