The Fastest Growing Bank in the West

Source: Boiling Frogs Post
Bill Bergman

Defending our Future in the Financial System

 

Investors and regulators are frequently cautioned that rapid growth in banking can be a sign of trouble.  With most of their incoming cash protected by public guarantees like deposit insurance, banks can grow by taking on more risk without as much sensitivity to deposit costs as they would if the public safety net were not in place.

For example, the Office of the Comptroller of the Currency (a bank regulator) produces “An Examiner’s Guide to Problem Bank Identification, Rehabilitation, and Resolution.”   In listing six ‘red flags,’ the guide’s first red flag, front and center, is ‘Rapid Growth and Aggressive Growth Strategies.’  This section includes:

Excessive growth, particularly as measured against local, regional, and national economic indicators, has long been viewed as a potential precursor to credit quality problems. Such growth can strain bank underwriting and risk selection standards, as well as the capacity of management, existing internal control structures and administrative processes.

Over the last six years, amidst the worst financial and economic crisis since the Great Depression, a large and significant player in the financial markets has also been one of the fastest growing banks on the planet.  That organization is the Federal Reserve Bank of New York.


What a Financial Crisis Can Do to a Central Bank Balance Sheet

Total assets on the books of the 12 Federal Reserve Banks came to $2.9 trillion by year-end 2011.  The Reserve Bank balance sheets have mushroomed in recent years; their total assets rose sharply with the Fed buying investments from, and lending money to, the private sector.  Their total liabilities also rose sharply as bank deposits at Federal Reserve Banks jumped due to monetary policy actions, and as banks had higher confidence in holding deposits with Reserve Banks compared to holding them at other banks.

Here is a look at total year-end assets on the books of the Federal Reserve Banks since 2003.