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TCH Bank Conditions Index shows the degree of resiliency of the banking sector remained close to historically high levels

Posted 09/18/2017 by Francisco Covas

The Clearing House Bank Conditions Index (TCHBCI) decreased slightly in the second quarter of 2017 after having registered its highest level of resiliency in the first quarter of this year (see Exhibit 1).

Exhibit 1

The Clearing House


Overall, the changes in each of the six subcomponents of the index – capital, liquidity, risk-aversion, asset quality, interconnectedness and profitability – were mixed.  The liquidity category of the index experienced a notable decline this quarter, but it remained close to its highest level of resiliency.  The index also showed a modest increase in risk-taking by banks.  The asset quality and profitability categories continued to show improvements in the degree of resiliency.  As discussed here, the level of profitability of the banking sector remains well below the average level of profitability observed in the decade prior to the start of the financial crisis.


The slight decrease in the degree of resiliency of the overall index in the second quarter is in most part driven by the decline observed in the liquidity category, although U.S. banks continued to have highly-liquid balance sheets and sizable liquidity buffers.  Specifically, all subcomponents of the liquidity category experienced slight declines.  For instance, as shown in the left panel of Exhibit 2 the share of assets financed with short-term wholesale liabilities has risen over the past few quarters, but remained close to its historical low level.  The increase in wholesale funding over the past couple of quarters has been driven by brokered deposits and other borrowed money with maturities less than one year.  Other measures of liquidity also decreased slightly, namely the gap between the maturity of assets and liabilities continued to rise and banks’ share of high-quality liquid assets ticked down.  In addition, the index also registered a modest increase in the level of risk-taking by banks this quarter, albeit from a very subdued level.  The rise in risk-taking was mainly driven by an easing in lending standards and a small increase in the ratio of loans to nominal GDP (not shown).  That said, headwinds arising from tighter banking regulations have likely continued to put downward pressure on loan growth, particularly on loans to borrowers with less-than-perfect or insufficient credit histories.  Lastly, bank interconnectedness edged down this quarter.


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, so a more profitable banking system is more resilient.  Although bank profitability is still subdued relative to historical standards, it rose in the second quarter of 2017, driven by improvements in net interest margins (shown in the right panel of Exhibit 2) and increases in noninterest income (not shown).  In addition, regulatory capital generally increased further this quarter and reached its highest level since the start of the index.  Finally, most subcomponents of the asset quality index improved over the quarter.  Exhibit 3 depicts the heat map of TCHBCI and 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, and the U.S. stress tests. 


Exhibit 4



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 23 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 (first 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.


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




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