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Hamilton Financial Index: July 2012

Hamilton Financial Index: July 2012

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Categories:Types, Research
Published by: The Partnership for a Secure Financial Future on Jul 16, 2012
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12/07/2012

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The Hamilton Financial Index:
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A semi-annual report on the stateof our financial services industr
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 With a review of the upcoming“fiscal cliff
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 July 2012
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 About this Report
The Partnership for a Secure Financial Future comprises the Consumer Bankers Association, Mortgage BankersAssociation, Financial Services Institute, and The FinancialServices Roundtable, which combined represent more than 2,700 member companies across all organizations.Hamilton Place Strategies is a consultancy based in Washington,DC with a focus at the intersection of business andgovernment. HPS Insight conducts in-depth analysis on publicpolicy issues.
About the Authors
Matt McDonald is a Partner at Hamilton Place Strategies. Heformerly worked on economic issues at the White House and isa former consultant with McKinsey and Company.Steve McMillin is a Partner at US Policy Metrics, an economic andpublic policy research firm serving asset managers, hedge fundsand the investor community. He is a former Deputy Director of  the Office of Management and Budget and a former partner atHPS.Patrick Sims directs research for HPS. He is a former leadresearch analyst in the financial institutions' group at SNLFinancial and is a former representative of CFA Institute.Russ Grote is an Analyst at Hamilton Place Strategies specializingin economic policy analysis and strategic communication.
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Hamilton Place Strategies | 1
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 Executive Summary
The U.S. financial sector continues to make important changes to strengthenitself against ongoing risks. As we document that improvement in this report,we also explore the tradeoffs inherent in today’s higher capital levels, and their implications for economic growth.The key findings of the report are:
 
The Hamilton Financial Index (HFI) rose seven points
since the previousquarter and stands at 1.22 as of the end of the first quarter. Banks’ increasein Tier 1 capital is driving the rise in the HFI.
For the HFI to dip belowhistorical norms, systemic risk would have to increase five times thesecond quarter high.
Conversely, if banks had not increased their Tier 1Common Capital Ratio from the level of three years ago, the secondquarter high of systemic risk would have pushed the HFI below normallevels.
 
 While the European debt crisis presents risks to the global economy, from the end of the first quarter of 2011 through the first quarter of 2012,
U.S.banks reduced exposure to the European periphery by over 16 percentand Europe as a whole by eight percent.
 
 
Lastly, our policy spotlight found that the upcoming fiscal cliff could bethe largest fiscal contraction in four decades, potentially causing asignificant drop in consumer demand and business investment.
The fiscalcliff is further complicated by elevated U.S. debt and annual deficits, apolitically contentious debt ceiling debate, constraints on the Fed, and theslowing of the global economy.There remain significant challenges to the U.S. and global economies. Despite this, the financial sector is positioned to support stronger growth as theeconomy improves.This report was commissioned by the Partnership for a Secure Financial Futureand the conclusions are that of the authors.Matt McDonaldSteve McMillinPatrick SimsRuss Grote

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