SYSTEMIC RISK DASHBOARD is a service of Ethics Metrics LLC that identifies risks to the financial stability of the United States that could arise from the danger of default or default, and potential systemic risk, of approximately 100 large, interconnected depository institution holding companies (DIHCs), Covered LHCs, and potential equity contagion risk for over 1,100 global equity investors in the large U.S. DIHCs.

  1. Examinations of all DIHCs, have incorporated additional guardrails since the Franklin National Bank opinion of 1979,  to evaluate the following risk factors, the most important one being systemic risk. New guardrails, from Section 604 of the Dodd Frank Act, codified in 12 U.S.C. § 1844(c)(2), are emphasized as bold, italicized and underlined. Examinations evaluate:
    1. “(I) the nature of the operations and financial condition of the bank holding company and the subsidiary;
    2. (II) the financial, operational, and other risks within the bank holding company system that may pose a threat to
      1. (aa) the safety and soundness of the bank holding company or of any depository institution subsidiary of the bank holding company; or
      2. (bb) the stability of the financial system of the United States; and
      3. (III) the systems of the bank holding company for monitoring and controlling the risks described in subclause (II); and
    3. (ii) monitor the compliance of the bank holding company and the subsidiary with—
      1. (I) this chapter;
      2. (II) Federal laws that the Board has specific jurisdiction to enforce against the company or subsidiary; and
      3. (III) other than in the case of an insured depository institution or functionally regulated subsidiary, any other applicable provisions of Federal law.” (link)
  2. Systemic Risk: DFA Section 203(c)(4), as codified in 12 U.S.C. § 5383(c)(4), defines danger of default or default as one of two sets of co-equal and independent systemic risk triggers.
    1. Trigger #1 is comprised of (A), (B) and (C) below. The most commonly known element is (B) as this is the focus of capital adequacy stress tests.
      1. Notice that the capital adequacy stress tests are evaluating two key elements of the CAMELS Rating system, i.e., Earnings or Losses that deplete Capital.
    2. Trigger #2 is (D). This covers Liquidity risks, which is another key element of the CAMELS Rating System.
      1. “(A) a case has been, or likely will promptly be, commenced with respect to the financial company under the Bankruptcy Code;
      2. (B) the financial company has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; (emphasis added)
      3. (C) the assets of the financial company are, or are likely to be, less than its obligations to creditors and others; or
      4. (D) the financial company is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.” (emphasis added)
    3. Capital Adequacy Stress Test Results: The potential systemic risks of (B), for 35 DIHCs with total assets above $50 billion, are analyzed by the Federal Reserve’s Stress Tests. The most recent results, as of June 21, 2018, are available here.
    4. Half-truths on Potential Systemic Risks:  Analyzing and disclosing the results of the capital adequacy stress tests omits an analysis on the other co-equal trigger for systemic risk, i.e., liquidity risks.  The narrative on capital adequacy stress tests is only telling half of the whole truth as it relates to one of the two, co-equal of triggers for systemic risk. Telling part of the truth obligates the party to tell the whole truth under common law.  Telling part of the story or half-truths misleads all DIHC investors and stakeholders on the full scope of the defined factors that cause systemic risk.

Chart 1: FSOC’s Quarterly Bank Health Index, 1Q2005 to 2Q2017

Ethics Metrics’ Methodology: The risk profiles of 112 DIHCs that disclosed formal enforcement actions (FEAs) on unsafe or unsound practices during 2002 to 2017, provide a full lifecycle of CAMELS Ratings data. The levels of compliance range from safety and soundness to unsafe or unsound practices, including default or in danger of default and bankruptcy. The profiles of CAMELS ratings are translated into private Ethics Metrics’ Risk Ratings. The Risk Ratings for the 112 DIHCs closely correspond with the issuance and termination of FEAs, validating Ethics Metrics’ ability to detect levels of non-compliance which have resulted in FEAs over the past 15 years. Ethics Metrics’ Risk Ratings have been reviewed and refined with assistance from bank regulators.

Consolidated Data: The data for Charts 2 – 9 comes from individual DIHC Reports, by Ethics Metrics, for each of the 100 currently active, large DIHCs (LHCs).

Chart 2: 100 Covered DIHCs’ Market Share of U.S. Banking Industry Assets is Almost 80%: 1Q2005 to 3Q2018

100 Covered DIHCs (link to “Coverage”) have increased their market share of the total assets of the U.S. banking industry from 58% in 1Q2005 to 78% in 3Q2018. This portion of the market represents the equivalent of a financial “black hole” due to the intentional concealment of 3 material compliance violations (Link to Chart 7) as confidential supervisory information by the majority of the 100 Covered DIHCs; while identical violations are disclosed for small DIHCs (assets less than $10 billion). This has created a bifurcated market that features superior knowledge, based on the intentionally concealed violations. This benefits the Covered DIHCs that are concealing while harming all other parties and stakeholders. For additional information, please see:

Chart 3: Heatmap of Quarterly Ethics Metrics’ Risk Ratings of 100 Covered DIHCs

Chart 4: Total Assets of 100 Covered DIHCs Segmented by Their Ethics Metrics’ Ratings

Chart 5: Noncore Borrowings of 100 Covered DIHCs Segmented by Their Ethics Metrics’ Ratings

Chart 6: Equity (Market Value) of the publicly-traded DIHCs Segmented by Their Ethics Metrics’ Ratings

For details on 1,127 Regsitered Investment Advisers (RIAs) that own 76% of the $2.1 trillion of equity on 83 publicly traded LHCs as of 9/30/2018, please click here for Table 1

Chart 7: SEC Compliance/Noncompliance for 100 Covered DIHCs

SEC compliance tests evaluate intentional concealment of 3 material compliance violations as confidential supervisory information. These include: (1) formal enforcement actions on unsafe or unsound practices, relating to financial condition and management risks; (2) loss of Well Managed supervisory rating due to compliance violations. Loss of Well Managed status triggers loss of Financial Holding company status, which is also not disclosed. (3) internal fraud and ineffective internal control over financial reporting (ICFR). This is concealed as part of calculating risk weighted assets for operational risks.

Paid Subscriptions: Information about paid subscriptions to the portfolio of ~100 DIHC Reports for qualified parties that include RIAs, DIHCs and regulators, is available by contacting Ethics Metrics.