The Fed Did a Lot of Talking Yesterday about a Big Bank Failure: Should We Worry?

Now, if you read between the lines of the finalized rule, it would appear that the banks have attempted to game this plan by buying up their own and/or each other’s TLAC debt, thus increasing the very interconnectedness and systemic risk that the federal regulators were trying to avoid. So the federal regulators, including the Fed, are going to spank the large banks by penalizing them on what they will count toward their regulatory capital if they hold their own or other bank’s TLAC debt.

The problem is that the largest interconnected risk between the banks is not their mutual holdings of each other’s debt, which is in the billions of dollars, but their mutual holdings of each other’s derivatives, which are in the trillions of dollars, in terms of face amount. The tangle of incestuous derivative relationships is as bad, if not worse, than it was in 2008. And these trillions of dollars in derivatives, thanks to a repeal of a part of Dodd-Frank through lobbying by Citigroup, are still sitting at the federally-insured part of the Wall Street bank, where the taxpayer is still on the hook for any blowup.

Credit default swaps, which allow Wall Street banks to buy and sell bets on which banks or corporations will blow up in a crisis, played a major role in the 2008 financial collapse. Despite that, according to the September 30, 2019 report from the Office of the Comptroller of the Currency (OCC), JPMorgan Chase has exposure to $1.2 trillion in Credit Default Swaps while Citibank has exposure to $1.76 trillion. According to the same OCC report, the total exposure to Credit Default Swaps among all national banks in the U.S. is $3.7 trillion – meaning that just these two banks are responsible for 80 percent of that exposure.

wallstreetonparade The Fed Did a Lot of Talking Yesterday about a Big Bank Failure: Should We Worry?