Hamilton Place Strategies | 1
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