Financial System of U.S. Rests on Health of Just Five Mega Banks

by Pam Martens and Russ Martens, Wall Street On Parade: According to the Federal Deposit Insurance Corporation (FDIC), as of March 31, 2017 there were a total of 5,856 banks in the U.S. operating under its Federal deposit insurance umbrella. But according to government financial researchers, five of those banks pose an ongoing material threat to the U.S. financial system. Not surprisingly, those five banks hold insured deposits for savers while simultaneously engaging in highly leveraged, high risk trading on Wall Street.

On June 27, Janet Yellen, the Chair of the U.S. Federal Reserve (the nation’s central bank) spoke at an event at the British Academy in London.

She stated the following about the U.S. financial system:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

We hate to be the bearer of bad tidings, but there is no substantive data to support Janet Yellen’s view. In fact, the very body that provides the intelligence to the Financial Stability Oversight Council (F-SOC), the U.S. Treasury’s Office of Financial Research (OFR), has been pumping out volumes of research that strongly suggest just the opposite. According to OFR’s research, those five Wall Street mega banks hold the fate of the U.S. financial system in their highly interconnected and highly dangerous hands. Tragically, that’s pretty much the same condition the U.S. was in heading into the crash of 2008.

According to OFR research:

“The larger the bank, the greater the potential spillover if it defaults; the higher its leverage, the more prone it is to default under stress; and the greater its connectivity index, the greater is the share of the default that cascades onto the banking system. The product of these three factors provides an overall measure of the contagion risk that the bank poses for the financial system. Five of the U.S. banks had particularly high contagion index values — Citigroup, JPMorgan, Morgan Stanley, Bank of America, and Goldman Sachs.”

According to data from the Office of the Comptroller of the Currency (OCC), those same bank holding companies as of March 31, 2017 were sitting on astronomical levels of derivatives: in notional (face amount) of derivatives, Citigroup held $54.8 trillion; JPMorgan Chase held $48.6 trillion; Goldman Sachs Group had $45.6 trillion; Bank of America held $35.8 trillion while Morgan Stanley sat on $30.8 trillion. Graphs in the OCC report show that the top 25 bank holding companies held a total of $242.3 trillion in notional derivatives at the end of the first quarter of 2017, of which these five bank holding companies accounted for 89 percent of that amount.

OFR research has also found systemic risks exist from these five banks’ holdings of large foreign assets and/or intrafinancial system liabilities, writing:

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