Board of Governors of the Federal Reserve System

November 05, 2019

Assessing Major Country Exposures of U.S. Banks Using 009a Data Reports: A Brexit Case Study

Alexander H. von Hafften¹

1. Introduction

The 009a Data Reports from the E.16 Country Exposure Lending Survey Statistical Release provide a bank-level view into major international exposures of U.S. commercial banks and bank holding companies.² This bank-level view allows for detailed analysis of how international risks may affect the U.S. financial system. In this note, I describe the 009a Data Reports and discuss their features. The major benefit of the 009a Data Reports over aggregate U.S. banking system data is that we can see how international exposures have changed for banks individually. In addition, as an example of using the 009a Data Reports, I analyze how the U.K. and E.U. exposures of U.S. global systemically important banks (G-SIBs) have changed since the Brexit referendum on June 23, 2016.^3,4,5

What are 009a Data Reports and where do they come from? The 009a Data Reports are based on the FFIEC 009a form, which supplements the FFIEC 009 form. The FFIEC 009 form requires respondent banks to detail international exposures to all foreign countries.⁶ In contrast, FFIEC 009a focuses on international exposures above a certain level based on the bank's size. While aggregate data based on FFIEC 009 are publically available, the bank-level data of FFIEC 009 are confidential.⁷ In contrast, the bank-level data from the FFIEC 009a are publically available.

The FFIEC 009a form and by extension the 009a Data Reports are broken up into two parts: Part A and Part B. The major difference between the parts is Part A provides more detail about these exposures than Part B. More specifically, Part A includes country exposures that exceed the lesser of 1 percent of the banks' total assets or 20 percent of its total capital.⁸ In the section 2, I'll explain some of the details that are included in Part A. In Part B of FFIEC 009a, the respondent bank lists (1) all other countries where its exposure exceeds the lesser of 0.75 percent of its total assets or 15 percent of its total capital and (2) the total exposures to all listed countries.

For all U.S. G-SIBs, their U.K. exposures are large enough to show up in Part A, while exposures to some smaller E.U. countries – for example, Ireland – often show up in Part B. As we walk through the details provided in Part A in section 2, we'll look at how the U.K. exposures of U.S. G-SIBs have changed over time. In section 3, we'll combine data from Part A and Part B to look at how their exposures have changed across Europe.

2. Part A of the 009a Data Reports

In general, the 009a Data Reports include three types of country exposures: direct cross-border claims, foreign office claims, and gross derivative claims. In Part A, each of these exposures is reported separately. Part A also provides various breakdowns, including by borrower-type (i.e., bank, nonbank financial institution, public, and other) and maturity (i.e., over one year and one year or under).⁹ While the instructions for the FFIEC 009a ask banks to do the borrower-type and maturity breakdowns excluding gross claims on derivatives, reporting is inconsistent across the sample – in particular, some U.S. G-SIBs break out both derivative exposures and non-derivative exposures by borrower-type.

Country Exposure Breakdown by Borrower-Type

The borrower-type breakdown allows analysts to examine possible differences in credit risk associated with the exposures. For example, we can differentiate private sector exposures from public sector exposures. My approach is to designate "Private Sector Exposures" as direct cross-border claims and foreign office claims on banks, nonbank financial institutions, and other nonpublic entities as well as all gross derivative claims and "Public Sector Exposures" as direct cross-border claims and foreign office claims on public entities.^10,11

Shown in the left panel of figure 1, U.K. private sector exposures across U.S. G-SIBs dropped from $466 billion to $295 billion (37 percent) between 2016:Q1 and 2019:Q1, likely representing a dramatic decline in these banks' vulnerability to Brexit-related risks.^12,13 Furthermore, each G-SIB reduced their U.K. private sector exposure individually between 2016:Q1 and 2019:Q1. The largest reductions were Citigroup, Goldman Sachs, and Morgan Stanley, whose exposures each declined between $35 billion and $40 billion. The smallest reductions were Bank of New York Mellon and Wells Fargo, whose U.K. private sector exposures declined by $573 million and $498 million, respectively. All components of aggregate private exposures decreased over this period, but aggregate gross derivative claims dropped the most – from $121 billion to $46 billion – and account for the majority of the particularly steep decline in U.K. private sector exposures during 2016.¹⁴

Figure 1: U.K. Private Sector and Public Sector Exposures

Shown in the right panel of figure 1, U.S. G-SIBs total exposure to the U.K. public sector rose from $87 billion to $133 billion (52 percent) between 2016:Q1 to 2019:Q1. These U.K. public sector exposures represent a growing fraction of total outstanding U.K. public debt.^15,16 In particular, Morgan Stanley and Bank of America increased their U.K. public sector exposure the most, each by over $10 billion.¹⁷ Larger U.K. public sector exposures likely do not nullify the sizeable reduction in risk from smaller private exposures because public exposure likely represent less credit risk than private exposures.

Country Exposure Breakdown by Maturity

Another breakdown in Part A of the 009a Data Reports is between exposures that mature in more than one year and exposures that mature in one year or under.¹⁸ This breakdown allows us to consider other risks associated with these exposures. For example, shorter-term U.K. exposures likely represent less risk than longer-term U.K. exposures for U.S. G-SIBs because a bank can choose not to rollover the portion of the shorter-term exposures that will mature before a possible disruptive or disorderly Brexit, while a bank may be locked into longer-term exposures.

U.S. G-SIBs total exposure (private plus public) to the U.K. have become shorter term between 2016:Q1 and 2019:Q1. In 2016:Q1, almost 40 percent of non-derivative exposures matured in more than one year, and in 2019:Q1, less than 30 percent of these exposures matured in more than one year. As shown in figure 2, the change in the maturity of universal banks' exposures – Bank of America, Citibank, JPMorgan Chase, and Wells Fargo – has driven the overall change, while the maturity of custodial bank exposures – Bank of New York Mellon and State Street – and investment bank exposures – Goldman Sachs and Morgan Stanley – have generally stayed the same.

Figure 2: Composition of U.K. Exposures by Maturity

Merging 009a Data Reports with Call Report Data

One approach for analysis of the 009a Data Reports data is to include other data, such as the FR Y-9C Call Reports. FR Y-9C Call Reports have ample information about bank holding company characteristics. One characteristic that could be particularly interesting is a measure of how large these country exposures are relative to the bank's capital. From a regulatory perspective, Tier 1 capital is the one of the primary measures of a bank's financial strength. In the context of looking at U.S. G-SIBs and U.K. exposures, higher U.K. private sector exposures relative to Tier 1 capital may reflect more vulnerability to a disruptive or disorderly Brexit.

As shown in figure 3, the investment banks – Goldman Sachs and Morgan Stanley – have the highest private sector exposures relative to their Tier 1 capital.¹⁹ Although they have declined dramatically, the private sector exposures of these banks still exceed 50 percent of their respective Tier 1 capital as of 2019:Q1. An important caveat to this observation is that the extent to which these exposures are hedged against adverse outcomes could mitigate concerns about the vulnerability to Brexit-related risks.

In comparison, the other U.S. G-SIBs appear to be less vulnerable to a disruptive or disorderly Brexit than the investment banks based on their U.K. exposures relative to Tier 1 capital. Although Bank of America, Citigroup, and JPMorgan have more private sector exposures in dollar terms, investment banks' exposures relative to their Tier 1 capital are much higher. Wells Fargo has very low U.K. exposures compared to the other seven G-SIBs, especially relative to its Tier 1 capital. The custodial banks fall between Wells Fargo and the three other universal banks; they appear to be less vulnerable to a disruptive or disorderly Brexit because most of their exposures—although longer-term (figure 2)—are to public entities (figure 1), which likely represent less credit risk.

Figure 3: U.K. Private Sector Exposures Relative to Tier 1 Capital

Based on looking at the 009a Data Reports and the FR Y-9C Call Reports, U.S. G-SIBs have substantially reduced their U.K. exposures since the 2016 Brexit referendum. This reduction has likely lowered the vulnerability of U.S. G-SIBs to Brexit-related risks, although the private sector exposures of the investment banks still appear high relative to their Tier 1 capital.

3. Part B of the 009a Data Reports

As discussed in the introduction, Part B of the 009a Data Reports provide data on banks' exposures to additional countries. The country exposures in Part B exceed the lesser of 0.75 percent of the bank's total assets and 15 percent of its total capital.²⁰ Instead of the detailed information provided in Part A, in Part B banks report the list of such countries and the total exposure across the list of countries.

Why might it be valuable to combine data from Part A with data from Part B? Including Part B provides a larger pool of countries to examine a bank's foreign exposures. For example, the finding that U.K. exposures decreased since the Brexit referendum raises questions about what happened to these exposures. Specifically, did the U.S. G-SIBs phase out their U.K. exposures or did they move them to other European countries? And if they moved exposures to other countries within the E.U., are these banks now more exposed to lower-risk core E.U. countries or higher-risk peripheral E.U. countries? Using Part A and Part B data together, I find that core E.U. exposures – to Belgium, Germany, France, Luxembourg, and the European Central Bank – of U.S. G-SIBs have steadily increased between 2016:Q1 and 2019:Q1. Their exposures to peripheral E.U. countries – Ireland, Italy, and Spain – are much smaller and, during the same period, have bounced up and down and in 2019:Q1 are about the same as in 2016:Q1.²¹

How much does incorporating Part B help us get a view into U.S. G-SIB exposures to the E.U.? For all U.S. G-SIBs, U.K. exposure are large enough to appear in Part A, but some smaller E.U. countries only appear in Part B for these banks during this period. As shown in table 1, incorporating Part B data more than doubles the number of observations for peripheral E.U. countries during this period.

Table 1: Number of Observations in Part A and Part B by Region

Since Part B only requires banks to list relevant countries and report the total exposure across listed countries, some approximation is required to combine data from Part A and Part B. To incorporate data from Part B data with Part A data, I use the following method:

1. If the bank lists a single country in Part B, the exposure to that country is the total exposure reported;
2. If the bank lists multiple countries, the exposure to each listed country is the lesser of 0.75 percent of the bank's total assets and 15 percent of the bank's total capital.

This approximation is, by construction, an underestimate; when a bank reports multiple countries in Part B, the approximation is the minimum exposure that would require the bank to report the exposure.

Figure 4 shows U.K. and E.U. exposures by region based on both Part A and Part B data. While the left panel shows U.K. exposures (in comparison to figure 1, figure 4 shows the sum of the private and public sector exposures), the center panel shows the core E.U. exposures. Between 2016:Q1 and 2019:Q1, core E.U. exposures steadily increased from $460 billion to $542 billion (18 percent). This increase accounted for 65 percent of the decrease in total U.K. exposures. The right panel of figure 4 shows peripheral E.U. exposures. Between 2016:Q1 and 2019:Q1, these exposures bounced around between $60 billion and $120 billion, starting and ending at $113 billion and $110 billion, respectively. This comparison suggests that the U.K. exposures of U.S. G-SIBs are not flowing into higher-risk peripheral E.U. countries.

Figure 4: U.K. and E.U. Exposures by Region

4. Conclusion

The 009a Data Reports provide a bank-level view into the major foreign exposures of large U.S. bank holding companies and commercial banks. In comparison to other public sources – namely, aggregate U.S. banking system statistics – these Data Reports provide this information on foreign exposures at the bank-level. Because exposures to a country are only included if they exceed a threshold based on the bank's size, these data are less helpful for analyzing country exposures that are relatively small.