A closer December 2016

look A publication of PwC’s financial services regulatory practice

Balancing act: A framework for managing

RWA density
Despite the ongoing economic recovery, the banking industry continues its struggle to return to
profitability levels achieved prior to the 2008 financial crisis. The industry’s efforts toward recovery
have been challenged by post-crisis risk aversion, a low interest rate environment, and an increase
in regulatory constraints not seen since the Great Depression. The 2008 financial crisis led to a
host of new regulations on the banking industry, including significantly higher capital requirements
and new liquidity constraints.

Accordingly, banks hoping to maximize their returns are re-considering their mix of assets. Banks
may no longer be able to enjoy the benefit of some previously profitable activities due to post-crisis
regulations, such as proprietary trading eliminated under the Volcker Rule, but they can still
achieve higher profitability by reassessing the mix of their permissible activities.

The largest US banks (i.e., the eight US G-SIBs1) have been focused on balance sheet optimization
for some time now. Their efforts have included the following: identifying which new capital or
liquidity regulations are binding constraints on the profitability of their activities (inclusive of the
varying annual impact of the Federal Reserve’s CCAR stress testing2); reducing some activities and
increasing others; and improving their data quality to sharpen analytical capabilities.3

Although the eight US G-SIBs may benefit from this paper, our analysis focuses more on assisting
the smaller systemically important financial institutions (SIFIs)4 in evaluating the profitability of
their asset mixes relative to capital and liquidity charges (see the Appendix for the list of
institutions we considered). In particular, we assess systemically important regional banks because
they share similar core-banking business models, allowing for more meaningful comparative
analysis.

Our approach assesses the relationship between return on assets (ROA) and risk-weighted assets
(RWA) density (i.e., the ratio of a bank’s RWA to its notional on-balance sheet assets). Currently,
there is no industry consensus on the “optimal” level of RWA density that maximizes ROA. This is
because there are many factors which influence ROA differences between banks. However, our
analysis of historical ROA and RWA densities of regional banks indicates that, as an empirical
matter, a fairly narrow range of RWA density exists wherein some regional banks have maximized
ROA relative to the level of economic risk taken (as measured by volatility of returns). We find this
narrow range of RWA density by applying Modern Portfolio Theory, a tool traditionally used for
asset management, to the banking industry.
Although this narrow band of RWA density is not the
cause of maximized ROAs, the results of our analysis
indicate the loan portfolio characteristics that are
common to those regional banks that maximize ROA
relative to economic risk. We then suggest that banks,
using their internal data, can extend our methodology to
a more granular analysis of their individual asset
portfolios in order to improve their profitability.
This A closer look analyzes systemically important US
regional banks’ RWA densities relative to their returns,
describes the loan portfolio features of the top
performing banks, and provides a way for banks to
extend our analysis to their own balance sheets.
Figure 1: Impact of key post-crisis financial regulations
Revenues Expenses
Enhanced prudential
standards & Stress testing
Basel III implementation
Derivatives reform
Resolution
Volcker rule
Extent of impact
High Medium
In response to these constraints and to improve their
capital positions, banks in recent years have undertaken
de-risking strategies to remove risky assets from their
balance sheets. While these efforts have resulted in
significant improvements in asset quality (as evidenced
by reduced loan loss provisions and lower net charge-
offs) they have also reduced returns, since less risky
assets tend to generate lower yields.
A closer look – PwC
Background
The decreased level of returns among US SIFIs since the
2008 crisis can be largely attributed to two factors:
growing regulatory constraints and the post-crisis low
interest rate environment.
As shown in Figure 1, new regulatory constraints have
increased banks’ costs while limiting their revenue
streams. Although the safety and soundness benefits of
stricter regulation (e.g., lower cost of capital due to
increased investor confidence) mitigates some of the
costs imposed by regulatory requirements, the net result
so far has been reduced profitability.
Capital
Liquidity/
funding
costs Required
RWA
capital
Low
In addition to new regulatory requirements, firms’
profitability have also been reduced by the
macroeconomic realities of post-crisis financial markets,
especially low interest rates. This impact is evidenced by
declining net interest margin (NIM), which measures the
difference between interest revenue and interest
expense. NIM has remained at low levels since the
financial crisis, greatly impacting regional banks because
they are particularly reliant on the spread between
interest earning assets and interest bearing liabilities.
2
Figure 2 illustrates that NIM has been on a downward First, we discuss our selection of these two key metrics,
trend over the past 20 years. and our rationale for focusing on regional banks. We
then establish a statistically significant relationship
Figure 2: Quarterly net interest margin between ROA and RWA density among regional banks.
for US banks (1990 – 2015)5 From there, we apply the tools of Modern Portfolio
Theory to identify the regional banks which have
5.0 maximized their ROA while minimizing its quarterly
4.8 volatility since 2009. Finally, we use this analysis to
identify a narrow range of RWA density in which these
4.6 top performing regional banks operate.
4.4
4.2
Metrics and data
4.0 ROA
3.8 After considering a number of different profitability
3.6
metrics, we select ROA as our indicator of bank
profitability. We define ROA as income before taxes,
3.4 extraordinary items, and other adjustments divided by
3.2 quarterly average total consolidated assets. We define
ROA this way because it is the purest way to measure the
3.0 performance of a bank’s assets without being affected by
2.8 leverage, tax strategies, or extraordinary items. Similarly,
we use average assets because it measures asset volumes
throughout a quarter, rather than merely at quarter-end
which may be more affected by window dressing tactics.

In an effort to improve their overall returns, banks have
focused on growing elements of non-interest income,
such as fee income, and on controlling non-interest
expenses. However, regulatory pressures and low
interest rates have nonetheless reduced return on equity
(ROE) at the US SIFIs considered in this analysis by over
50% between 2006 and 2015.
A window into the optimized
balance sheet
In light of these regulatory constraints and low interest
rates, senior management at banks has understandably
focused its attention in the search for the right mix of
activities that maximize profits. Our analysis assesses
balance sheet optimization efforts through two key
metrics which indicate profitability and regulatory
capital charges – namely, ROA and RWA density.
We do not use ROE to measure profitability so that we
may focus on the profits generated from a bank’s assets
without the influence of the bank’s capital structure.
Using ROE would enable a more levered bank to display
greater profitability than a more well-capitalized bank
even if the two firms have identically productive assets.
RWA density
The metric against which we compare ROA, RWA
density, is a ratio that compares a bank’s RWA (the
ratio’s numerator) to its notional on-balance sheet assets
(the ratio’s denominator). A ratio approaching 1
generally indicates a high level of risk-taking in the eyes
of regulators (since RWA uses regulator-prescribed risk
weights) while a ratio well below 1 indicates lower risk-
taking. RWA density can also be thought of as a bank’s
leverage ratio divided by its risk-based capital ratio, as
depicted in Figure 3.

Figure 3: RWA density equation

Tier 1 capital
Tier 1 leverage ratio Average assets Tier 1 capital RWA RWA
= = x =
Tier 1 capital ratio Tier 1 capital Average assets Tier 1 capital Average assets
RWA

A closer look – PwC 3

Some regulators and industry participants have voiced
concerns about the limited comparability and the
sometimes counterintuitive variation in RWAs across
banks in different countries, caused in part by regulators’
different risk-weighting methodologies. Our analysis is
not impacted by this concern because our data set is
limited to US banks. However, the time frame of our data
(2009 through 2015) includes a transition period
between different RWA density calculation
methodologies under Basel I and Basel III. To account
for this change in methodology, we reviewed our analysis
using both Basel I and Basel III data and determined
that there was no statistically significant impact resulting
from the application of different standards. Therefore,
we consistently use Basel III’s standardized approach
methodology for our RWA density metric.
Data set
The starting point for our data universe is the 30 US
SIFIs which were subject to CCAR as of 2014.6 We use
these banks due to their importance to the industry and
the quality of data they are required to validate and
report. We reviewed six years of quarterly RWA density
data (from 2009 through 2015) for this set of banks and
identified the distribution of RWA density within each of
four industry categories — regional banks, universal
banks, custody banks, and specialty banks. Please see
Appendix for the names of the banks in each of these
four categories.
We find that, not surprisingly, regional banks have a
considerably higher RWA density compared to custody
banks. This disparity is a result of the differing business
activities of these two types of banks; custody banks
typically have much smaller loan portfolios (which
attract higher risk weights due to higher credit risk) as a
percentage of total assets and a much higher percentage
of cash and US government securities (which carry very
low risk weights).
Furthermore, we observed that regional banks had
higher RWA densities than universal banks. This
disparity is significant to note as it indicates that
regulators generally place a higher capital charge on the
lending activities performed by regional banks than on
the capital market activities performed by universal
banks. This perceived increase in the “riskiness” of
regional banks likely stems from the limited RWA
benefit that regional banks can derive from hedging and
netting opportunities of their loan portfolios, as opposed
to universal banks which gain RWA benefit from hedging
and netting in their trading books. This is a somewhat
counterintuitive result given that our universal banks are
G-SIBs, which the Basel Committee has determined to
pose the greatest systemic risk. However, the Basel
Committee of course considers more than the balance
sheet riskiness when making its determination.
Figure 4 depicts the maximum, minimum, and median
quarterly RWA densities across the four SIFI categories
over the six-year period. It demonstrates that the
regional banks had a median RWA density of a bit more
than 0.80, which is higher than the means of both the
universal and custody banks.

Figure 4: Distribution of quarterly RWA density by SIFI category (2009 – 2015)

1.40
1.24
1.20 1.10

1.00
0.83
0.80 0.70
0.72
0.60

0.52
0.40
0.37
0.32
0.20

0.00
Regional (17 SIFIs) Universal (6 SIFIs) Custody (3 SIFIs) Specialty (3 SIFIs)
Median

A closer look – PwC 4

Figure 5 further illustrates differences among these four
categories of banks, specifically with respect to changes
in the banks’ median RWA density from 2009-2015. As
demonstrated by the fairly consistent pattern across
Figure 5: Median RWA density trends by SIFI category (2009 – 2015)
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
Regional Universal
2009 2010 2011
Given the disparity of this data across the four categories
of banks, we opted to focus on our analysis on the
regional category of banks. This focus will allow for more
meaningful insight into the relationship between ROA
and RWA density because of the quantity of banks in the
regional category and the strong comparability of their
business models and risk-taking behaviors. While it
might be reasonable to also include the more comparable
segments of banks in the other SIFI categories (i.e., core
lending activities), different SIFI categories face different
binding regulatory constraints that may impede
meaningful comparative analysis. For example, because
the universal banks are G-SIBs, they are subject to much
more stringent capital requirements in the form of an
RWA-based capital surcharge, leverage capital
surcharge,7 and Total Loss Absorbing Capacity (TLAC)
requirements.8 Nonetheless, the analytical approach
described in this paper can be applied by G-SIBs to their
commercial and retail banking loan portfolios as well.
The relationship between RWA density
and ROA
Due to the many factors which influence a bank’s RWA
density (e.g., business activities and risk tolerance), there
is no general industry consensus for maximizing returns
at an “optimal” RWA density target point. An approach
employed by at least one equity research analyst suggests
that optimum RWA density is derived by setting both the
A closer look – PwC
categories, SIFIs that were forced to de-risk extensively
in the first few years after the financial crisis
subsequently began to invest again in assets with higher
risk weights in recent years.
Custody Speciality
2012 2013 2014 2015
leverage and risk-weighted capital ratios equal to their
regulatory minimums, thereby resulting in a 0.59
“optimal” point.9 While this may be a reasonable starting
point, the “optimal” RWA density calculated by this
method fails to consider a number of significant firm-
specific factors, including necessary capital buffers to
account for CCAR’s annual impact and the impact on
returns from other regulations (such as new liquidity
constraints as part of Basel III implementation10 and
others listed in Figure 1).
There is little doubt that increasing RWA density tends
to increase ROA (up to a certain point). Figure 6 depicts
a scatterplot of quarterly RWA density and quarterly
ROA for regional banks from 2009 to 2015 and includes
a best-fit trend line (with a 95% confidence interval). The
trend line evidences a positive relationship between
RWA density and ROA (i.e., as RWA density increases,
ROA also increases).11
However, a regional bank that increases its RWA density
may not experience the increase in ROA implied by the
trend line due to the impact of the bank’s idiosyncratic
asset mix (i.e., two banks with identical RWA densities
can and often do have different ROAs). More importantly,
even where the trend line does hold true, merely
increasing RWA density alone is not a good strategy for
increasing ROA. Doing so may significantly increase
capital charges on the loan portfolio and may lead to a
sub-optimal loan portfolio allocation.
5
 Figure 6: Quarterly ROA and RWA density trend for regional banks (2009 – 2015)
15%
10%
5%
ROA
0%
-5%
-10%
-15%
0.35 0.45 0.55 0.65
As a result of these realities, it is necessary to look more
closely at the relationship between ROA and RWA
density. We believe that a strategy for maximizing ROA
would be greatly complemented by an understanding of
the range of RWA densities at which banks have been
able to maximize returns relative to the economic risk
taken to achieve those returns (i.e., the volatility of those
returns, rather than regulator-prescribed risk weights).
Therefore, we apply Modern Portfolio Theory – a tool
traditionally used by asset managers – to our regional
banks in the next section.
Applying Modern Portfolio Theory to
maximize ROA relative to volatility
Our objective in using Modern Portfolio Theory (MPT) is
to identify the regional banks which have most
successfully maximized ROA while minimizing risk,
which we will measure as their quarterly volatility from
2009 – 2015. Using MPT, we can compare quarterly
ROA with its associated volatility, and then graph that
relationship in order to produce an “efficient frontier”
curve. ROAs which fall below the efficient frontier will be
suboptimal because it is possible to achieve a greater
ROA for the incurred level of risk.
To create the efficient frontier, we first calculate the
mean and standard deviation (as a measure of the
variability or risk) for each bank’s ROA over the 24
quarters between 2009 and 2015. The quarterly ROAs of
A closer look – PwC
0.75 0.85 0.95 1.05 1.15 1.25
RWA density
each of the seventeen banks gives us a total of 408 data
points (i.e., 17 banks x 24 quarters). Although these data
points represent the point-in-time returns of individual
banks, they can also be viewed as the returns of 408
different portfolios of assets.
We then create a matrix of the covariance coefficients
among the ROAs of Bank 1 through Bank 17. This
covariance matrix reflects how any two banks’ ROAs
move in relation to one another. With the goal of
creating a portfolio that maximizes return, while
minimizing volatility through diversification benefits, we
then identify the most efficient portfolios by testing every
combination of banks’ ROA and standard deviation
(i.e., by adjusting the weightings of Bank 1, Bank 2, etc.,
to create “new” banks with portfolio characteristics taken
from our sample banks).
Selecting the maximum ROA at each point of standard
deviation yields the efficient frontier displayed in Figure
7A. The points along this curve represent the maximized
returns for a portfolio (i.e., an efficient blend of banks)
for a given amount of risk (standard deviation) based on
our portfolio constructions. Consistent with MPT, this
efficient frontier represents bank portfolios drawn from
our population with the highest Sharpe Ratios (i.e., the
average ROA greater than the risk-free rate divided by
the standard deviation of the ROA) indicating the
greatest achievable returns for given levels of risk.
6
 Figure 7A: Efficient frontier for regional banks Figure 7B: RWA density range of efficient frontier
(2009 – 2015) (2009 – 2015)

Portfolio Bank Weights (RWA density)

Bank Standard Sharpe
ROA Bank 1 Bank 2 Bank 3 Bank 4 RWA density (7B)
portfolio Deviation (7A) Ratio
(76.45) (90.40) (84.64) (83.00)

Portfolio A 3.6% 0.079 4.56 28% 9% 63% - 0.8287

Portfolio B 4.1% 0.084 4.88 - 7% 57% 36% 0.8445
Portfolio C 4.4% 0.092 4.78 - - 36% 64% 0.8359

Figure 7A and the left side of the table under it show that
the ROA of each portfolio increases as standard
deviation increases, which is to be expected. Far more
interestingly, looking across the table shows that the
majority of the efficient frontier – the portion of the
graph from point A to point C – is made up of just four
banks (referred to as Banks 1 to 4).
Portfolio A, for instance, consists of 28% of Bank 1’s total
assets, 9% of Bank 2’s total assets, and 63% of Bank 3’s
total assets. This was the ideal combination of slices of
these banks to maximize ROA at a relatively low level of
risk (i.e., an ROA of 3.6% with a portfolio standard
deviation of only 0.079). Portfolios B and C add Bank 4’s
assets, which increases these portfolios’ risk and ROA.
Since these four banks dominate their counterparts
along the efficient frontier, we henceforth refer to them
as top performers.
Having generated this efficient frontier, we are now
ready to return to our goal of finding a range of RWA
density that has been empirically aligned with
maximized ROA. Since we have all of the SIFIs’ RWA
densities from 2009 to 2015 (graphically depicted in
Figures 4 and 5), we can incorporate that data for the top
performers into Figure 7B. Figure 7B depicts, for
instance, that Portfolio A has an RWA density of 0.8284.
This number was calculated by taking the weighted
average of the RWA densities of Banks 1, 2, 3, and 4,
which is based on the percentage of their ROA included
in the portfolio and are enumerated in the table under
Figures 7A and 7B.12
Figure 7B also shows that Portfolio B has the highest
RWA density at 0.8445. This is a somewhat surprising
result because it suggests that a narrow band of RWA
densities (i.e., from 0.8284 to 0.8445) has maximized
ROAs with minimized volatility. This range is notably
higher than that hypothesized by equity research
analysts (i.e., 0.59, as mentioned earlier). It is also
significantly narrower than the wide range of regional
banks’ RWA densities depicted in Figure 4.

A closer look – PwC 7

Characteristics of top performers
Before analyzing the loan books of these four top
performing banks in more detail, it is noteworthy that
our identification of these four as top performers is
consistent with the views of the marketplace. First, the
banks that compose the portfolios on the efficient
frontier have been consistently rated as “buy” or
“overweight” by equity research analysts, and the share
prices of these banks have increased more than their
peers from 2009 to 2015.13
Second, these four banks also have relatively lower costs
of equity (COE) than their counterparts, suggesting that
that the market deems the top performers as more
attractive (and likely safer) investments. From 2009 to
2015, top performers reported average COE of 12.5%,
compared with 14.75% reported by other regional banks
(and 15.5% reported by universal banks).14
We now analyze these top performers’ loan books with
respect to (a) balance between high- and low-risk loans,
(b) composition by loan type, (c) loan growth, and
(d) operational efficiency.
Balance between high- and low-risk loans
More so than their peers, the four top performers take a
“barbell” approach to their mix of loans – i.e., they use
lower risk-return products (such as 1st lien mortgages)
to balance higher risk-return products (such as credit
cards). This approach allows top performers to maximize
risk-adjusted returns, while remaining in the RWA
Figure 8: Top vs. bottom performing banks’ loan portfolio composition (2009 – 2015)
9.6%
11.7%
3.3%
20.9%
24.1%
10.1%
19.4%
Top performers
1st lien 2nd Lien/Heloc CRE
A closer look – PwC
density range identified by the efficient frontier. Top
performers have a smaller portion of their portfolios
invested in moderate risk-return assets (such as 2nd
lien/HELOC loans), as these products neither have high
enough returns to justify the added regulatory capital
requirements, nor low enough risk to counter-balance
riskier assets in the portfolio. Therefore, it is possible
that the top performing banks may have optimized their
risk-return trade-offs and associated regulatory capital
charges by pairing the higher risk-adjusted returns of
credit cards and consumer loans with less capital
intensive products such as 1st lien mortgages.
It is interesting to note that while MPT traditionally
promotes the benefits of broad diversification in asset
portfolios, the effective trend demonstrated by our MPT
analysis is a segmentation approach that focuses on
balancing the high and low end of the risk spectrum.
These institutions have successfully managed portfolios
of assets that generate higher yields for their given levels
of risk, maintaining profitability against potential losses
while reducing the amount of regulatory capital to be
held according to the risk-weighting construct developed
by regulators.
Composition by loan-type
Confirming our barbell approach hypothesis, Figure 8
compares the loan portfolios of the four top performing
regional banks to the bottom four performing banks
according to the efficiency frontier. The figure shows that
top performers had significantly higher percentages of
1st lien mortgages and credit card loans than did the
bottom performers.
7.3%
6.7%
0.4%
23.1%
34.4%
12.7%
15.5%
Bottom performers
C&I Credit card Other consumer Other loans
8
However, the most noteworthy difference between the
top and bottom performers is the difference in the
percentage of assets allocated to commercial real estate
(CRE) loans. Defaults on CRE loans have continued to
decline since a peak in 2010,15 which would indicate that
a significant CRE portfolio could potentially be
characteristic of a top performing bank; however, it is
the bottom performing banks that had the largest share
of CRE as a percent of assets. As a result, it is our view
that the bottom performers may have a high volume of
older CRE loans, have mispriced the risk of their more
recent CRE loans, or simply feel they have no choice but
be overweight CRE loans given their limited access to
other potential customer groups (e.g., due to strategic,
competitive, or regional constraints).
Loan growth
The top performers’ annual loan growth is also higher
than their counterparts, as demonstrated in Figure 9
below. With this high loan growth, top performers have
more opportunity to seek new strategies that maximize
ROA in light of changing asset risk/reward ratios and
regulatory capital levels.
Figure 9: Regional banks’ average
net loan growth (2009 – 2015)
8.2%
4.6%
Average Top performers
Operational efficiency
Finally, the top performing banks in our analysis report
better operational efficiency ratios (i.e., non-interest
expense divided by revenue) than their peers, as shown
in Figure 10. Top performing banks manage expenses
better and achieve greater operational efficiencies.
A closer look – PwC
Figure 10: Regional banks’ average
efficiency ratio (2009 – 2015)
65.9%
56.6%
Average Top performers
Applying the analysis
Our MPT analysis provides one possible method for
banks to navigate through complexity and optimize their
returns relative to volatility. Firms can review the
common characteristics among the top performing
banks we have identified (or even conduct a similar
exercise with a different group of peer banks) and the
RWA density range we have identified, and use this
information to improve their pricing, product mix,
capital, and other key decisions.
However, applying MPT in the way we did is only a
starting point for a bank’s analysis. Our model is limited
in that it assumes ROA to be the only driving factor in a
bank’s approach to defining RWA density. In reality,
many other factors can influence a firm’s balance sheet
mix, such as legacy or regional factors that cause it to
stick with its historical asset profile; barriers to entry for
certain businesses; and the current competitive
positioning of the institution. Moreover, in setting long-
term strategy for their portfolio mix, many firms would
not only optimize their asset mix to achieve the highest
possible ROA today, but would also look for stability and
growth of returns over time by considering the future
outlook for different businesses and customer segments.
Therefore, we suggest that banks go beyond applying our
analysis at a macro-level (i.e., by comparing themselves
to others) but also at a micro-level. Banks should use
their own proprietary data to construct an efficient
frontier across different portfolios of assets or even
across individual assets themselves (i.e., creating
hypothetical portfolios of assets rather than of banks like
we did in this paper). In doing so, banks can customize
the types of assets that they consider and identify the
portfolios which maximize returns and minimize
volatility within the level of RWA density (i.e., capital
charges) they are willing to assume.
9
What’s next?
Going forward, the hard work of optimizing balance
sheets will continue to be challenging as regulatory
constraints continue to develop. Over the next year or so,
US regulators will likely set new standardized
approaches to credit, market, and operational risk in
order to implement what is quickly becoming known as
“Basel IV.” Further, US regulators may join Basel in
implementing the Standard Approach to Counterparty
Credit Risk (SA-CCR) for measuring derivatives
exposure (in place of today’s less risk-sensitive Current
Exposure Method), which would greatly impact the US
supplementary leverage ratio calculation.
A closer look – PwC
The reality is that the dust from the regulatory explosion
following the financial crisis has still not settled, so
effectively optimizing balance sheets will remain a
moving target. However, banks have little choice but to
continue improving their capital and liquidity resource
allocation decision making processes, which requires
significant investment in data analytics and robust
governance. Those that have done so have demonstrated
that they can attain higher ROAs and ROEs, and the
investments were worth it.
10
Appendices

Appendix – Names of SIFIs by category

The 30 US SIFIs considered in this paper were subject to CCAR as of 2014. The three US SIFIs which became subject to
CCAR after 2014 (Deutsche Bank Trust Corporation, TD Bank US, and BancWest) were not included in our analysis.

Regional Custody Specialty Universal

BB&T M&T BNY Mellon Ally Financial Bank of America
BBVA Compass PNC Northern Trust American Express Citigroup
BMO Regions State Street Discover Financial JP Morgan
Capital One RBS Citizens Wells Fargo
Comerica Santander Goldman Sachs
Fifth Third Bancorp Suntrust Morgan Stanley
HSBC North America MUFG Union Bank
Huntington Bancshares US Bancorp
KeyCorp Zions

Endnotes
1. The eight US global systemically important banking institutions (G-SIBs) include the US’s six major universal banks and two of the
US’s three major custody banks.
2. The Fed’s annual Comprehensive Capital Analysis and Review (CCAR) is dependent on the Fed’s macroeconomic scenarios and
other assumptions which change from year to year; therefore, CCAR unpredictably impacts the amount of regulatory capital that
banks must hold each year. See PwC’s First take, Five key points from the Fed’s 2016 CCAR (June 2016).
3. For more information on the balance sheet optimization efforts of G-SIBs, please see our article “The Elephant Beyond Basel”
published in Banking Perspective by The Clearing House (Q2 2016).
4. According to the Dodd-Frank Act, SIFIs are defined as bank holding companies with $50 billion or more in total consolidated
assets.
5. Source: Federal Reserve Economic Data (FRED).
6. Although the Appendix lists 30 total banks and 18 regional banks, our analysis centers on 17 regional banks throughout the rest of
this paper because one of the banks’ ROA and RWA density were outliers and caused misleading means and other results.
7. See PwC’s First take, Key points from the Fed’s final G-SIB surcharge rule (July 2015).
8. See PwC’s First take, Ten key points from the Fed’s final TLAC rule (December 2016).
9. Given the previously cited enhanced requirements for G-SIBs, this 59% figure would likely differ for G-SIBs.
10. These liquidity constraints include the recently proposed Net Stable Funding Ratio (NSFR) and the finalized liquidity coverage
ratio (LCR). See PwC’s First take: US Net Stable Funding Ratio (April 2016) and PwC’s First take: Liquidity coverage ratio
(September 2014).
11. The trend line assumes a linear relationship between ROA and RWA density, and has a positive slope of 0.0491 and statistical
significance demonstrated by a p-value of 5.34e-7.
12. More specifically, we used the quarterly RWA densities associated with the banks’ quarterly ROAs that led to the efficient frontier.
13. The top performing banks, on average, increased their share price by 144% from 2009 to 2015, whereas other banks within the
same time period only increased their share price by 108%. Source: SNL financial.
14. Source: Bloomberg.
15. The annual number of defaults has decreased from 2,284 in 2010 to 500 in 2015. Source: Standard & Poor’s.

A closer look – PwC 11

www.pwcregulatory.com

Additional information

For additional information about this a closer look or PwC’s

Financial Services Regulatory Practice, please contact:

Dan Ryan Mike Alix

Financial Services Advisory Leader Financial Services Advisory Risk Leader
646 471 8488 646 471 3724
daniel.ryan@pwc.com michael.alix@pwc.com
@DanRyanWallSt

Adam Gilbert Shyam Venkat

Financial Services Advisory Regulatory Leader Financial Services Advisory Principal
646 471 5806 646 471 8296
adam.gilbert@pwc.com shyam.venkat@pwc.com

Armen Meyer
Financial Services Advisory Managing Director
646 531 4519
armen.meyer@pwc.com

Contributing authors: Paul Margarites,

Jennifer Snape, Tatyana Pazhitnykh, and Adam Weisz.

To learn more about financial services regulation from

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Regulatory Navigator App from the Apple App Store.

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