World’s biggest banks are less likely to wreck the economy than a decade ago

After a decade of being regulators’ favourite target, the world’s biggest banks now pose less of a risk to the economy than before the financial crisis, according to the Bank for International Settlements.

The most important institutions today are more resilient to shocks, and thus significantly less likely to run into trouble, just as regulatory reforms first introduced in 2011 had intended, the BIS said in its latest quarterly review, which was released Sunday. At the same time, these banks became less critical to the overall financial system, it said.

After the crisis, regulators sought to identify the firms posing the biggest risks to the global financial system and subjected them to tougher rules than the rest — most importantly, by requiring higher capital cushions. The most recent BIS list of 29 systemic banks is topped by JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc.

Global systemically important banks, as they are known, “have become more resilient in recent years, thanks to a build-up in capital buffers and a shift to more stable sources of funding,” according to the BIS. “Weak profitability, however, has hindered further improvements.”

Banks in the U.S. reduced their reliance on wholesale funding more strongly in comparison to their European peers because regulations were transposed differently in the two regions, the BIS said. The crisis, which started in 2007, showed that an over-reliance on funding from other financial institutions can quickly expose banks to disruptions.

The BIS’s findings shouldn’t be taken as an all-clear, however. The measurement of risk posed by lenders remains uncertain — for instance, by underestimating “complex interlinkages in the banking sector,” the BIS said. On top of that, risks may simply be moving outside of the traditional banking sector, it said.