Dodd-Frank At Six: Changes Too Big To Ignore Amid campaign rhetoric, an overview of the changes at the six largest financial institutions since the passage of Dodd-Frank July 2016 Executive Summary

• Recently on the presidential campaign, in speeches, and on Capitol Hill, there is no shortage of new ideas to reform finance. Glass-Steagall, break-ups, ever-higher capital requirements, and repeal and replace have all dominated discussions.

• Often missed in these discussions are transformational changes in the banking sector, and specifically among large banks. Capital has more than doubled, liquidity has more than tripled, and large banks have dramatically simplified structures to support resolution strategies.

• At the same time, trade-offs exist in all policies, and current and proposed reforms must be weighed against their impact on the economy at large. Large banks serve multinational clients, support small businesses, and are consumers' most popular choice for deposits.

1 Policy Responses Ended TBTF By Improving Bank Safety And Minimizing Impact Of Failure Policies end TBTF by…

…Reducing the likelihood …Minimizing the impact of a failure on of failure. the broader economy. • Doubling the quantity and improving • Improved resolution strategies through the quality of capital, while tripling Single Point Of Entry (SPOE) give liquidity, dramatically reduces the regulators new tools to wind down large likelihood that bank losses lead to failure. institutions without using taxpayer money. • Improved oversight through regular • Living wills process helps drive reforms stress tests and agency restructuring to improve resolvability, including will keep banks and regulators more aware reducing bank legal entities by 20 percent. of risks. • Banning proprietary trading through the Volcker Rule reduces risks associated with • Restrictions on bank size through new trading operations at commercial banks. rules prohibits large banks from acquiring or merging with other firms.

In addition to these approaches, many of the emergency in 2008 are now illegal, requiring legislative overhaul to be implemented again.

2 Large Banks Are…

• Safer • Smaller And Simpler • Resolvable • Important To The Economy LARGE BANKS ARE SAFER

The Largest Banks Have Boosted Capital Ratios 51 Percent And Liquidity By More Than 200 Percent

Large banks are far more capitalized …And maintain more liquidity to handle since the crisis… credit crunches. Median Tier 1 Ratio For Six Largest Banks Six Largest Banks’ Aggregate Liquidity Position

+51% 14 10 9 12 8 10 7

8 6 All Other Assets 5 6 4

4 3 Trillions of Dollars ($) Dollars of Trillions Tier 1 Capital Ratio (%) Ratio Capital 1 Tier 2 +209% 2 Liquid 1 Assets* 0 0 Q2’08 Q1’16 Q2’08 Q1’16

*Liquid assets equals cash plus short term investments 4 Source: Federal Reserve Economic Data, Bloomberg LARGE BANKS ARE SAFER

Further, Global U.S. Banks Added $445 Billion In High Quality Capital Since Mid-2008, A 102 Percent Increase

CRITICS SAY: BUT THE FACT IS: There should be more Large banks' capital increases nearly doubled TARP capital. support for the entire industry. "Increased capital, in Aggregate Tier 1 Capital For the form of common The Six Largest Banks +102% equity, solves many 0.9 problems. It is the simplest and arguably 0.8 the most powerful tool 0.7 $445B to make banks 0.6 stronger." 0.5 - , 0.4 Minneapolis Fed 0.3 President and Former $430B $430B TARP Chief BillionsDollarsof ($) 0.2 0.1 0.0 Q2'08 Q1'16

Source: Bloomberg 5 LARGE BANKS ARE SAFER

Large Banks' Simple Leverage Ratio Has Increased 43 Percent, Acting As A Credible Backstop To Risk

CRITICS SAY: BUT THE FACT IS: Leverage ratios should be U.S. banks’ leverage ratio is nearly double international stronger. standards.. "The rules ignore such Simple Leverage Ratio For Large banks' dependence on Banks* fragile, short-term 10 financing and don't +43% 9 allow for the fact that they are particularly 8 good at using risk 7 weights to shrink their 6 assets…When it comes to regulating bank 5 capital, simple is best." 4 3 - Bloomberg Editorial 2

Board (%) Ratio Leverage Median 1 0 Q2’08* Q1’16

Source: Bloomberg 6 *Excludes Goldman Sachs and Morgan Stanley due to unavailability of data LARGE BANKS ARE SAFER

U.S. Banks Maintained Nearly Double The Regulatory Minimum During The Fed's Severely Adverse Scenario

CRITICS SAY: BUT THE FACT IS: We need to do more for Banks have enough capital to absorb $526 billion in stability. hypothetical stress test losses. "I think we'd absolutely Tier 1 Capital Ratio For 33 Largest Bank increase capital Holding Companies requirements. We've 14 got to do some things 12.3 to provide some safety 12 1.8 and stability for our 10 financial system." 2.1 8.4 8 - Former Sen. Rick Santorum 6 Equity Losses

Percent (%) Percent Under 4 Hypothetical 2 Crises 0 Q3’15 Adverse Severely Remaining Scenario Adverse Capital Scenario Buffer Source: Federal Reserve 7 Large Banks Are…

• Safer • Smaller And Simpler • Resolvable • Important To The Economy LARGE BANKS ARE SMALLER AND SIMPLER

Since The Crisis, Three Of Largest Six Banks Have Shrunk; Four Since 2010

CRITICS SAY: BUT THE FACT IS: The banks keep on Four of the six largest banks are smaller since Dodd- getting bigger. Frank.

"Dodd-Frank didn't really Bank Asset Changes Since Q3'10 Q3'10 Q1'16 affect the big banks. -7% They're bigger now than they've ever been. We -9% reformed nothing."

- Former Gov. Mike Huckabee

"Three out of four of the -3% -4% largest banks are larger today than when we bailed them out. If they're too big to fail they're too big to exist." Bank Of Citi Goldman Sachs Morgan Stanley - Sen. Bernie Sanders America 9 LARGE BANKS ARE SMALLER AND SIMPLER

Further, Large Banks Have Grown Slower Than Banks As A Whole, The S&P 500, And The U.S. Economy

CRITICS SAY: BUT THE FACT IS: The sector is more Large bank growth is well behind other measures of the concentrated. economy as well the banking sector at large. "Given that banks have Changes Since Q3'10 grown larger and more concentrated since the 80 74.8% financial crisis, she 70 [Warren] warned that 60 taxpayers are still not free from the possibility of 50 -79% having to bail them out 40 37.1% again in the future." Percent 30 21.4% - Think Progress 20 10 7.7% 0 S&P500 All U.S. Largest Commercial Economy Banks Banks

10 LARGE BANKS ARE SMALLER AND SIMPLER

Large Banks Have Simplified Since The Crisis Through Divestitures And Reduction In Legal Entities

Large banks have simplified, divesting assets …While individual banks have worked to slim since 2010 overall… down and simplify. Acquisitions and Divestitures Since 2010 • has divested from $70B in non-core assets and reduced its number of 120 legal entities by 50 percent.

80 • Goldman Sachs shrank six percent since 2010 and 24 percent since 2007, while the pay per 104 40 employee fell 13 percent since 2010 and 43 percent since 2007. 0 -228 • Citi Holdings has sold more than $700B in

-40 assets since the crisis. Number -124 -80 • Morgan Stanley went from earning 70 percent from trading in 2007 to less than 50 percent -120 today.

-160 • JPMorgan has shed $160 billion in assets in the Acquisitions Divestitures Net past year.

Source: CNBC, KBW 11 Large Banks Are…

• Safer • Smaller And Simpler • Resolvable • Important To The Economy LARGE BANKS ARE RESOLVABLE

With New TLAC Rules, Total Loss-Absorbing Capacity Is Four To Five Times The Level Of Crisis Losses

Background Median Leverage Ratios For The Six Largest Banks (%) • TLAC facilitates SPOE: In the event 14 13% of failure, TLAC ensures the ultimate parent has an adequate amount of 12 capital available to absorb losses 10 from operating entities. 9% Fed 8 Requirement • Capital Impact: The 6% Under Basel III 6 estimates TLAC will raise capital Rules, Which requirements to 4.4-5 times the (%) Percent 4 Are Being losses projected under the Fed's Phased In severely adverse scenario. 2 0 • FDIC Chair Martin Gruenberg: "In Pre-crisis Current Under my view, we are at a point today that Under Levels TLAC* if a systemically important financial Basel I institution in the United States were to experience severe distress, it would be resolved in an orderly way under *Methodology: Analysis identified total loss absorbing capital necessary to meet a 23 percent threshold of current risk-weighted either bankruptcy or the public assets and expressed this figure as a ratio to total assets. Note Orderly Liquidation Authority." that certain capital instruments included in TLAC are not eligible for inclusion in regulators’ supplementary leverage ratio.

13 LARGE BANKS ARE RESOLVABLE

In 2015, Banks Expanded The 2014 ISDA Derivatives Contracts Protocol, Which Simplifies Resolution

2014 Rule 2015 Extension Easier Resolution

• In 2014, the • New protocol signed in • Delay gives regulators International Swaps November 2015 by time to ensure that critical and Derivatives ISDA and 21 global parts of a bank continue Association (ISDA) and financial firms smoothly while the 18 global financial firms • Protocol extended to company is wound down agreed to a 48-hour include stay on in an orderly way stay on derivatives securities finance • ISDA CEO O'Malia said contracts for failing transaction master new protocol "captures a firms agreements wider universe of financial • Stays applied to new • New agreement covers contracts, further and existing contracts more than $560B in reducing" risk to system • More than 90 percent of additional cross-border • FSB Chair Carney said he derivatives contracts securities was "particularly pleased" are held by institutions to see industry covered by the stay rule collaboration on protocol

Source: Reuters; Bloomberg; FSB; ISDA 14 LARGE BANKS ARE RESOLVABLE

There Is No Funding Advantage For Large Banks As Market Perceptions Of A Have Eroded

CRITICS SAY: BUT THE FACT IS: Bailout perceptions still The GAO found any advantage due to perceptions of exist a future bailout "may have declined or reversed." "Systemically important Number Of Models With Statistically Significant Results banks can borrow 39 money at lower rates, 40 37 Funding Advantage giving them a 35 substantial competitive Funding Disadvantage advantage, because 30 investors know those 25 banks will be bailed out in the future. It has to 20 18 15 stop." 15 14 11 - Former Gov. Rick 9 Perry NumberModelsof 10 8 4 5 2 0 0 0 2008 2009 2010 2011 2012 2013

Source: Lawrance Evans Testimony, Figure 1 15 Large Banks Are….

• Safer • Smaller And Simpler • Resolvable • Important To The Economy LARGE BANKS ARE IMPORTANT TO THE ECONOMY

Economies Of Scale Allow Large Banks To Provide More Services At Lower Costs

Large Banks Would Be 220% Less "Quantitatively, a 10 percent increase in assets is Efficient As Smaller Institutions associated with a 0.3 to 0.6 percent decline in noninterest expense scaled by income or assets, depending on the 18 specification." 16% – Anna Kovner, James Vickery, Lily Zhou, New York Fed 16 14 "If these 17 banks were broken into smaller banks with 12 +220% $100 billion in assets but with no change in their output 10 mix, costs would increase from $410 billion to $1.48 trillion. This scale effect means the average cost per dollar of 8 assets would increase from 4.5 percent to 16.3 percent, an 6 5% increase of 11.8 percentage points." 4 – Joseph Mester and Loretta Hughes, Wharton 2

"In a global economy, there is a need for financial Average Cost Per Dollar Of Assets Of Dollar Per Cost Average 0 institutions with scale and global capacity. Large banks Current Size* Broken Up As offer their customers products, services and infrastructure Smaller Banks that smaller banks cannot match, from multicity branch With $100B In networks to global coverage that lowers costs." Assets – Phillip Swagel, University of Maryland

Source: Wharton (2013); of New York (2014); Bloomberg (2012) *Based on 2013 financial data 17 LARGE BANKS ARE IMPORTANT TO THE ECONOMY

Americans Overwhelmingly Choose To Deposit And Bank With The Country's Largest Financial Institutions

Top Ten Bank Holding Companies By Retail Deposits, Q3'15 "Big Six" Bank

1,100

1,000 The largest banks also scored 900 higher in consumer satisfaction than midsize and regional banks 800 700 600 500

400 Billions of Dollars of Billions 300 200 100 0 Bank Of Wells J.P. Citi US Bank PNC Capital Morgan SunTrust BB&T America Fargo Morgan One Stanley

Source: Bloomberg 18 LARGE BANKS ARE IMPORTANT TO THE ECONOMY

98 Percent Of Multinational Companies Surveyed By BRT Use Large U.S. Banks For Domestic Operations

Percent of BRT Member Companies That Use Large U.S. Banks For Domestic And Overseas Services "Large U.S. banks are often uniquely positioned to deliver this critical infrastructure. They have 100 2% 11% Don’t Use the scale needed to meet the 90 financial needs of U.S. companies 80 of all sizes. They also maintain operations in markets around the 70 world, providing globally engaged 60 U.S. companies with the truly global reach needed to quickly 50 98% 89% Use expand into new markets… As a

40 result, large U.S. banks frequently Percent(%) 30 serve as trusted partners to globally engaged U.S. companies, helping 20 them grow, sustaining their 10 competitiveness, and providing 0 economic benefits, both at home Use for U.S. Use for Overseas and abroad." Operations Operations - Business Roundtable Source: BRT 19 LARGE BANKS ARE IMPORTANT TO THE ECONOMY

While Capital Is Important, Too Much Can Create Costs That Far Outweigh Benefits

Large Bank Regulatory Costs "For the economy as a whole, new capital standards would +113% impose a cost that shows up in the form of reduced lending, 80 slower growth, and diminished incomes." $74 – Douglas Holtz-Eakin, Former Director of the CBO 70

60 "[New capital requirements] force bank transactions into the 50 shadow market, where there are no capital requirements." – Dick Bove, Bank Analyst 40 $35 30

Billions of Dollars of Billions "But 'more capital' shouldn't be confused with 'you can't have 20 too much capital' – because you can. Capital comes at a cost – both to banks and the economy at large – in the form of forgone lending as institutions shrink to meet extreme 10 capital-to-asset ratios." 0 – Jim Chessen, ABA Chief Economist 2007 2013

Source: Federal Financial Analytics 20