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2017 Q3 TCH Bank Conditions Index Shows the Banking System Remains Extremely Resilient

Posted 12/06/2017 by Francisco Covas

The Clearing House Bank Conditions Index (TCHBCI) rose in the third quarter of 2017 and registered its highest level of resiliency since the start of the sample in 1996 (see Exhibit 1).

Exhibit 1

The Clearing House


Overall, the degree of resilience of the large majority of the subcomponents of the index – capital, risk-aversion, asset quality, interconnectedness and profitability –rose this past quarter.  As shown below, the increase in the level of resiliency is evenly distributed across these five subcomponents.  The only exception was the liquidity category, which experienced a slight decline, but it remained close to its highest level of resiliency.


There are two categories of the index worth emphasizing this quarter, capital and risk aversion.  The increase in the degree of resilience in the capital category was driven mainly by the increase in V-Lab’s measure of market leverage ratio under stress, which reached its highest value since the second quarter of 2007 (shown in the top panel of Exhibit 2).  The rise in the market leverage under stress indicates that banks’ post-stress leverage ratios have improved in recent quarters, driven by increases in banks’ equity valuations.  V-Lab’s measure uses a stress scenario defined by a 40 percent fall in the stock market over a six-month period.  The rise in risk aversion was mainly driven by a slight decline in the ratio of loans to nominal GDP (shown in the bottom panel of Exhibit 2).  Although results from the most recent Senior Loan Officer Opinion Survey indicated that banks experienced weaker demand for business loans in the third quarter, headwinds arising from tighter banking regulations have likely also continued to put downward pressure on loan growth, particularly on loans to borrowers with less-than-perfect or insufficient credit histories.  In particular, annual loan growth slowed from 7¼ percent in 2016 to 4½ percent in the third quarter of 2017.


Exhibit 2


The Clearing House

 The Clearing House



The other categories of the index shifted toward levels consistent with greater resilience in the banking sector.  Banks recover from adverse shocks primarily by rebuilding capital through retained earnings and retaining it, so a more profitable banking system is more resilient.  Although bank profitability is still subdued relative to historical standards, it rose in the third quarter of 2017, driven by improvements in net interest margins.  In addition, all subcomponents of the asset quality and interconnectedness categories improved over the quarter.


In contrast, the slight decline in resiliency observed in the liquidity category was driven by a continued increase in the gap between the maturity of assets and liabilities held by banks.  U.S. banks continued to have highly-liquid balance sheets and sizable liquidity buffers and banks’ share of high-quality liquid assets edged up.


Exhibit 3 summarizes these results by depicting the heat map of TCHBCI for each of the six categories that comprise the aggregate index.  Values near 100 (higher resiliency) are shown in blue while values near 0 (higher vulnerability) are shown in red.


Exhibit 3

 The Clearing House

Finally, Exhibit 4 provides the readings on each of the six categories that comprise TCHBCI at two different points in time: (i) the end of 2008, the nadir of the past crisis and (ii) the most recent quarter.  Points plotted near the center of the chart indicate a high degree of vulnerability in that category while points plotted near the rim indicate high resiliency.  As shown by the red line, in the fourth quarter of 2008, the quarter immediately after the failure of Lehman Brothers, almost all categories of the aggregate index were at very low levels indicating the presence of acute vulnerabilities.  Over the years since the crisis, almost all categories of the index have improved considerably, as shown by the blue line, especially the capital and liquidity positions of U.S. banks.  These improvements largely reflect the efforts of banks to increase their capital and liquidity following the financial crisis, the more stringent capital and liquidity requirements that are part of Basel III, improved risk management and the U.S. stress tests.


Exhibit 4

 The Clearing House

Background information on TCHBCI

The Clearing House introduced TCHBCI at the end of 2016 in order to provide a quantitative assessment of the resilience of the U.S. banking sector using a wide range of common indicators of bank condition and updates the index at a quarterly frequency.  The index synthesizes data on 24 banking indicators, grouped into six categories: capital, liquidity, risk-aversion, asset quality, interconnectedness and profitability. 

The aggregate index assesses the resilience of the banking sector from the first quarter of 1996 to the present (third quarter of 2017) on a scale of 0 to 100.  A value of 100 indicates that the banking sector is at its most resilient since the first quarter of 1996; conversely, a value of 0 implies that the U.S. banking sector is at its most vulnerable.  Although a value of 100 is associated with a maximally resilient banking system, it is probably not the level most conducive of robust economic growth.  On the one hand, having extremely safe banks is desirable from a financial stability perspective as vulnerabilities in the banking system amplify and propagate adverse economic and financial shocks, resulting in severe and persistent economic downturns.  On the other hand, a banking system that is excessively risk-averse will also have an adverse impact on economic growth over the medium and longer term by restraining credit to borrowers that are bank-dependent (e.g., small businesses) and via higher lending rates on loans to all types of borrowers.  We find that GDP growth is at its highest when the TCHBCI is about 60 (see the dashed line in Exhibit 1).  Currently the TCHBCI is close to 100, suggesting that bank caution or banking regulations could be holding back economic growth.



Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of The Clearing House or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.




  • The Clearing House
  • The Clearing House
  • The Clearing House
  • The Clearing House




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