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U.S. Post-Glass-Steagall Big Banks Still Dangerously Leveraged

July 2, 2017 (EIRNS)—The recent stress tests conducted by the 34 largest U.S.-based banks, supervised by the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), were reported in all the financial media as unambiguously reassuring. Although Bloomberg News admitted a number of the big banks "stumbled through," and immediate bank losses in a "recession scenario" were found to be $500 billion, Fed Chair Janet Yellen pronounced that the tests meant "We will not have another banking crisis in my lifetime."

The last bank panic and economic crash became global when Lehman Brothers, which had dangerously borrowed itself up to a 36:1 leverage ratio, collapsed at the first sign of serious losses and liquidity problems.

Based on the Federal Reserve’s data, here are the current, mid-2017 leverage ratios of the "big six" U.S. banks. These six post-Glass-Steagall banks have 62% of the deposits and 67% of the assets in the entire U.S. banking system.

Their leverage ratios are: Goldman Sachs 3.1% (32:1 debt leverage); Morgan Stanley 3.2% (31:1); JPMorgan Chase 3.9% (24:1); Bank of America 4.3% (23:1); Citigroup 4.5% (22:1); Wells Fargo 5.3% (19:1). By contrast, the 5,000 community banks’ average leverage ratio is 9.5% (10.5:1). The latter is, as Glass-Steagall prime sponsor Rep. Marcy Kaptur (D-Ohio) said in her recent video, "prudent banking." The former is speculation on an immense and dangerous scale.

What FDIC vice-chair Thomas Hoenig said in about these banks in a 2014 FDIC report, is still true: They are seriously overleveraged, and they have 30% more derivatives exposure than they did in 2007. They are set up and exposed to the rising tide of defaults in the U.S. corporate, credit card, and auto debt bubbles.