The Question and Answer Board

[joyceschoice]

I found a recent link about derivatives. It adds a little more substance to your point. I'll highlight the final paragraphs and I've provided a link to the entire article.

"Looking more carefully at the chart, we are tempted to say that banks higher up—those with a larger difference between the two measures—are more likely to be using their derivatives books to conceal risk. Morgan Stanley (gray) and Goldman Sachs (red) stand out. On the other end, State Street (black), Bank of New York Mellon (orange) and Wells Fargo (green) are not playing this particular game. For the others, we see that the variation over time in JP Morgan Chase’s derivative positions (purple) is unrelated to the leverage gap, suggesting that their derivatives business is driven by something other than the desire to take on risk. Citigroup’s pattern reveals little. By contrast, the positive slope over time of the Bank of America (black) observations is consistent with using derivatives positions to manage its apparent leverage.

Where does this leave us? First, large banks tend to have very large off-balance-sheet positions that collectively account for most of the over-the-counter derivatives outstanding. This can leave them massively exposed to the failure of a large derivatives counterparty. Second, the difference between measures of leverage is positively related to the size of banks’ derivatives books. This leaves us wondering whether some banks are using these massive positions to conceal risk. And, it leads us to conclude that proposals to tax leverage should be proposals to tax the systemic risk-taking (or marginal leverage) of an institution in its entirety, including both on- and off-balance-sheet exposures and including exposures both on the asset and the liability side of the balance sheet.

Figuring out how to do that is an immense task that is both pressing and important."

http://www.moneyandbanking.com/commentary/2016/5/2/leverage-and-risk