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.
Accordingly, banks hoping to maximize their returns are re-considering their mix of assets. While there are numerous approaches for banks to "optimize" their asset mix and maximize returns relative to economic risk and regulatory constraints, we found that the top performing systemically important US regional banks share similar risk and return tradeoff strategies.
This A closer look analyzes US regional banks’ risk-weighted assets (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.