Just how big are the biggest US banks, and how safe are they? When trying to figure all that out, it makes a big difference if you are analyzing them according to US accounting standards or international ones. The latter makes lenders account for a greater portion of risky derivatives on their balance sheets.
Take JPMorgan, for instance. Under US accounting rules, the bank is just the fourth largest in the world with total assets of $2.3 trillion and capital equal to roughly 7% of total assets. But under international rules, where lots of off-balance sheets assets like derivatives are accounted for, according to Bloomberg, JPMorgan would be the largest in the world with assets of $4.5 trillion and capital equal to less than 4% of assets. The higher that capital ratios are, the less likely banks are to face liquidity and solvency problems.
Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., would prefer using stricter accounting standards. “Derivatives, like loans, carry risk,” Hoenig said in an interview with Bloomberg. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”