The Bank for International Settlements said the world’s biggest banks are actually more resilient and pose less of a risk to the economy than before the financial crisis.
According to its latest quarterly review, BIS said regulatory reforms introduced in 2011 helped make large financial institutions less of a threat to the economy by subjecting them to tougher rules and requiring higher capital cushions. The most recent BIS list of 29 systemic banks is led by JPMorgan Chase, Citigroup, Deutsche Bank and HSBC.
These banks “have become more resilient in recent years, thanks to a build-up in capital buffers and a shift to more stable sources of funding,” according to BIS. “Weak profitability, however, has hindered further improvements.”
One way U.S. banks have improved their position, BIS explained, is by reducing their reliance on wholesale funding in comparison to their European peers.
The report comes as talk of a financial recession and a weaker global economy continues to grow, with continued uncertainty linked to Brexit and trade wars limiting borrowing and investment appetite across the globe. And while European banks have endured market volatility while U.S. peers outperform, analysts warn that U.S. banks are actually more exposed to an economic downturn.
In fact, many economists took the Federal Reserve’s decision to cut the federal interest rate as an effort to mitigate recession risks. Morgan Stanley said in July that there is a 20 percent of a recession in the coming year.
“For now, the path to the bear case of a U.S. recession is still narrow, but not unrealistic,” said Morgan Stanley’s analysis, led by Chief U.S. Economist Ellen Zentner. “If trade tensions escalate further, our economists see the direct impact of tariffs interacting with the indirect effects of tighter financial conditions and other spillovers, potentially leading consumers to retrench.”