- Major US banks including JPMorgan Chase, Bank of America, and Citibank are reportedly holding trillions of dollars in unknown and potentially risky assets off their balance sheets, according to recent data from the Federal Financial Institutions Examination Council (FFIEC).
- Off-balance sheet accounting is a common practice in the banking industry and played a significant role in the 2008 financial crisis.
- Despite the Federal Reserve’s proposal to impose higher capital requirements on banks, CEOs from major banks have argued against these changes, claiming they could harm the banking industry and the wider economy.
US banks, including JPMorgan Chase, Bank of America, and Citibank, are holding trillions in unknown and potentially risky assets off their balance sheets, raising concerns about financial stability and transparency in the banking sector.
Trillions in Off-Balance Sheet Assets
The FFIEC data, first reported by Wall Street on Parade, reveals that JPMorgan Chase holds $3.227 trillion off-balance sheet, Bank of America holds $1.6 trillion off-balance sheet, and Citibank holds $2.6 trillion off-balance sheet. The Federal Reserve defines off-balance sheet activities as diverse and may include instruments such as firm loan commitments, standby letters of credit, foreign exchange, financial futures, forward contracts, options, interest rate swap contracts, and other derivative products.
Off-Balance Sheet Accounting and the 2008 Financial Crisis
Off-balance sheet accounting has been a prevalent practice in the banking industry for years. As Wall Street on Parade notes, it played a significant role in the 2008 financial crisis. More than other banks, Citigroup held assets off its balance sheet, in part to hold down capital requirements. If those had been included, leverage in 2007 would have been 48:1, or about 53% higher. Citigroup, of course, blew itself up in 2008 and received the largest bailouts in global banking history.
Proposed Changes and Industry Pushback
In July of last year, the Federal Reserve announced a proposal that would impose higher capital requirements on banks to ensure their balance sheets are more resilient in economic downturns. However, CEOs at JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, BNY Mellon, and State Street argued against the proposed changes in a Senate Banking Oversight Committee hearing in December. In a prepared statement, JPMorgan Chase CEO Jamie Dimon said the changes would damage the banking industry and the economy at large.
Conclusion
The practice of off-balance sheet accounting by major banks raises concerns about financial transparency and stability. While the proposed changes by the Federal Reserve aim to ensure more resilience in economic downturns, pushback from industry leaders suggests a complex road ahead. As the debate continues, the need for transparency and stability in the banking sector remains paramount.
