Federal Reserve Bank of New York Executive Vice President Kevin J. Stiroh expressed concern regarding the increasing similarity of the underlying business models in some of the largest U.S. financial firms. Citing a Bank of Japan Working Paper on the risk of homogeneity, Mr. Stiroh warned that if all firms are "effectively the same" and susceptible to the same "shocks," the market becomes more volatile.
In remarks at the Financial Times U.S. Banking Forum, Mr. Stiroh stated that the growing similarities within U.S. banking may be due to a range of capital and liquidity regulations that are pressuring firms to develop similar business models. According to Mr. Stiroh, the causes may include (i) post-crisis regulation that requires firms to work against multiple capital constraints, (ii) post-crisis earnings pressure due to the current interest rate environment, and (iii) the likelihood that large financial firms face the same technological forces and pursue identical opportunities.
Mr. Stiroh advised supervisors and regulators to address the risks posed by this trend by taking a broad approach to supervision and risk and urging an "industry-wide, macroprudential perspective" to track changes within the U.S. financial industry.
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