Opinion

The Great Debate

Banks’ exposure to the Obama Plan

January 25, 2010

President Barack Obama’s proposals to ban banks from proprietary trading unrelated to serving their customers will have a very uneven impact on the sector.

There is no easy way to identify how much money the major banks make from proprietary trading rather than market-making, brokerage and hedging services on behalf of their customers. The banks do not break out their activities in this way, and the regulators do not collect standardised data.

But it is possible to identify which banks depend most heavily on trading rather than investment or commercial banking activities, and which are therefore potentially most exposed to a tightening of the regulations to prevent proprietary trading unrelated to serving their customers.

The attached charts (see here and here) show the 20 largest banks in the United States by average assets and the share of their adjusted operating income derived from trading activities in the first nine months of 2009. The numbers are taken from the Form Y-9C Consolidated Financial Statements which banks themselves file, published by the Federal Reserve in the form of Bank Holding Company Performance Reports (BHCPR), and used by federal bank supervisors:

Of the biggest banks, Goldman Sachs (55 percent) and Morgan Stanley (36 percent) depend far more than the others upon trading for the lion’s share of their adjusted operating income.

Other significant traders are Barclays U.S. (18 percent) and Deutsche-Taunus (17 percent), followed more distantly by Bank of America (12 percent), JP Morgan Chase (12 percent), Citigroup (9 percent), Bank of New York-Mellon (8 percent) and State Street (7 percent).

In contrast, the top 77 banks (with over $10 billion of assets each) derived on average just 2.5 percent of their operating revenues from trading, according to the Federal Reserve’s peer group statistics.

Not all those trading revenues are at risk. Many will be from “customer-related” activities. But if the administration’s proposed “Volcker Rule” separating banking from proprietary trading is enacted by Congress and enforced by bank examiners it is these banks that face the largest dent in their revenues, or at least the most intrusive regulation to ensure revenues really are customer-related and not speculation for the house.

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