U.S. Bank Balance Sheets May Hide Risk

Warning: Banks in the U.S. may be bigger than they look. That label might be required for the country’s four largest lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. The issue is what banks include on their balance sheets, where they list assets, such as loans and investments, and liabilities, including deposits. U.S. accounting rules allow banks to keep most mortgage-linked bonds off the books and record a smaller portion of their derivatives than European peers, underestimating the risks firms face and lowering how much capital they need. “Derivatives, like loans, carry risk,” Hoenig says. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

Including more mortgage bonds that are packaged into securities and applying international standards for derivatives would make some U.S. banks look twice as big as they say they are, according to data compiled by Bloomberg. JPMorgan’s balance sheet would swell to $4.5 trillion from $2.3 trillion. Bank of America and Wells Fargo would double their assets, while Citigroup’s would jump 60 percent. Their combined assets would be $14.7 trillion, based on third-quarter 2012 figures, the latest available—equal to 93 percent of last year’s gross domestic product.