FSB and IOSCO Seek to Identify Non-bank Non-insurer G-SIFIs

On 8 January 2014, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) published a consultation paper on “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (NBNI G-SIFIs).  The consultation period closes on 7 April 2014. Continue reading

How to Spot a G-SII

Introduction

On 12 December 2013, the European Banking Authority (EBA) published a consultation paper on draft regulatory technical standards (RTS) on the methodology for the identification of global systemically important institutions (G-SIIs)[1] and draft implementing technical standards (ITS) on uniform formats and dates for the disclose of the values of the indicators used for determining the score of G-SIIS[2]. Continue reading

FSB Updates G-SIB List

On 11 November 2013, the Financial Stability Board (FSB) published an updated list of global systemically important banks (G-SIBs) using end-2012 data.

The Basel Committee on Banking Supervision (BCBS) has also separately published the denominators used to calculate G-SIB scores and the Cut-off score and bucket thresholds that were used to allocate G-SIBs to particular buckets. The denominators are to be updated annually, while the cut-off score and bucket thresholds will remain fixed until November 2017, the date when the first three year review of the G-SIB assessment methodology is due to completed. Continue reading

Updated G-SIB Methodology Highlights Importance of Data

Introduction

On 3 July 2013, the Basel Committee on Banking Supervision (BCBS) published an “Updated assessment methodology and the higher loss absorbency requirement” (the “Updated Methodology”) for identifying globally systemically important banks (“G-SIBs”), accompanied by a reporting template and instructions.

The Methodology

The Updated Methodology replaces the BCBS’ previous “Global systemically important banks: assessment methodology and the additional loss absorbency requirement”, published in November 2011.  It defines a methodology for identifying G-SIBs founded on an indicator-based measurement approach.  Each indicator is group into one of five equally-weighted categories, as detailed below:

Quantitative Indicator-Based Approach

Category (and weighting)

Individual Indicator

Indicator weighting

Cross-jurisdictional activity (20%) Cross-jurisdictional claims

10%

  Cross-jurisdictional liabilities

10%

Size (20%) Total exposures as defined for use in the Basel III leverage ratio

20%

Interconnectedness (20%) Intra-financial system assets

6.67%

  Intra-financial system liabilities

6.67%

  Securities outstanding

6.67%

Substitutability/financial institution infrastructure (20%) Assets under custody

6.67%

  Payments activity

6.67%

  Underwritten transactions in debt and equity markets

6.67%

Complexity (20%) Notional amount of OTC derivatives

6.67%

  Level 3 assets

6.67%

  Trading and available-for-sale securities

6.67%

For each bank being assessed, the score for a particular indicator is calculated by dividing the individual bank amount (expressed in EUR) by the aggregate amount for the indicator summed across all banks in the sample.  This figure is then multiplied by 10,000 to express the indicator score in terms of basis points.  Each category score for a bank is determined by taking a simple average of the indicator scores in that category. The overall score for a bank is then calculated by taking a simple average of its five category scores.

Qualitative Supervisory Judgment

The quantitative indicator-based approach described above can be supplemented with qualitative supervisory judgment.  This is only meant to override the indicator-based approach in exceptional circumstances, is subject to peer review and is based on the following four principles:

  • the bar for judgmental adjustment to indicator-based scores should be high;
  • the process should focus on factors pertaining to the impact of a bank’s failure, not the probability of its failure;
  • views on the quality of the policy/resolution framework within a jurisdiction should not be taken into account; and
  • the judgmental overlay should comprise well documented and verifiable quantitative as well as qualitative information.

Identifying G-SIBs and Higher Loss Absorbency

Banks that have an assessment score that exceeds a pre-determined cutoff level will be classified as G-SIBs.  Supervisory judgment may also be used to add banks with scores below the cutoff to the G-SIB list.  G-SIBs will be initially allocated into four equally sized buckets based on their scores, with varying levels of higher loss absorbency (“HLA”) requirements applied to the different buckets, as detailed below.  It is worth noting that the figures below represent minimum levels, with national regulators being free to impose higher requirements if they so wish.

The G-SIB assessment will be performed annually and may lead to the reallocation of a G-SIB into a different bucket.  The timing of the publication of the cutoff score and bucket thresholds has been brought forward by one year to November 2013 and will be based on end-2012 data supplied by banks.  Whereas previously, the BCBS had intended to delay updating the denominators used to calculate banks’ scores until the completion of the first three-year review of the G-SIB methodology, denominators will now be updated on an annual basis so as to avoid creating a “cliff effect” for banks.  The methodology itself will be reviewed every three years in order to capture developments in the banking sector and advances in the measurement of systemic importance.

The HLA requirement is to be met only with Common Equity Tier 1 capital and will be implemented through an extension of the capital conservation buffer.  It will be phased in in parallel with the capital conservation and countercyclical buffers, starting on 1 January 2016 and becoming fully effective on 1 January 2019.

Bucket

Higher Loss Absorbency Requirement (common equity as a percentage of risk-weighted assets)

 

5

3.5%

4

2.5%

3

2.0%

2

1.5%

1

1.0%

If a G-SIB breaches the HLA requirement, it will be required to remediate and will be subject to limitations on dividend payouts in the meantime.  If a G-SIB is reallocated into a higher bucket, it will be required to meet the additional HLA requirement within 12 months.

Disclosure requirements

Starting with financial year-ends on or around 31 December 2013 and continuing thereafter, all banks with a leverage ratio exposure measure exceeding EUR 200 billion (this will automatically include the world’s 75 largest banks) will be required to ensure that the 12 indicators used in the assessment methodology are made publicly available.  This disclosure should be required no later than four months after the financial year-end, and by the end of the following July at the latest.  The reporting and disclosure requirements necessary to facilitate implementation must be enacted by national regulators by 1 January 2014.

Conclusion

The reporting templates through which bank supply the underlying information on which the G-SIB assessment methodology is based, highlights the increasing importance of data in the lives of banks.  The data required to be provided as part of G-SIB identification process is high level but assumes that banks have equally high levels of underlying data integrity as well as ready access to information pertaining to a wide range of activities, including on- and off- balance sheet items, derivatives, security arrangements and payments.

In an environment where regulatory constraints are restricting the ability of banks to broaden their business offerings, the ability to generate and disseminate accurate data is fast becoming the new frontier by which banks can differentiate themselves in front of both their clients and their regulators.  In order to take advantage of this changing landscape, it is imperative that banks focus on the development of a culture whereby data occupies a position of central importance within the institution.  As the updated G-SIB methodology shows, over time, the consequences of failing to get this right will only become yet more serious.

US “megabanks”: Too-big-to-fail or just too big to survive?

This is a link to an article which appears in yesterday’s FT which describes a bill introduced into Congress by Sherrod Brown (Democrat) and David Vitter (Republican) under which banks with more than USD 500 billion in assets would be required to meet a new capital requirement of 15%.  At this stage, it seems that the prospects of the bill becoming law are slim, but ultimately only time will tell.

FSB Completes Stage 1 of G-SIB Common Data Template

On 18 April 2013, the Financial Stability Board (FSB) published a press release announcing the completion of a common data template for globally systemically important banks (G-SIBs).

The financial crisis highlighted major gaps in information on systemically important financial institutions, particularly the bilateral linkages between such institutions, or their common exposures and liabilities to financial sectors and national markets.  In response, the G-20 charged the FSB with developing:

  • a common data template for systemically important global financial institutions; and
  • proposals for an international framework to support the collection and sharing of information on such institutions.

 The G-SIB template represents the completion of stage 1 of the project.  Stages 2 and 3 will involve the extension of the framework to include the collection of data on bilateral funding dependencies and consolidated balance sheet.  The data will be held in a central data hub, hosted by the BIS, and will be shared on with national supervisory authorities which are part of the framework.

Resolution Plans for all G-SIBs by End of June 2013

On 16 February 2013, the finance ministers and central bank governors of the G20 published a communique following the closure of their meeting in Moscow on 15 and 16 February 2013.  Amongst other things, the G20 confirmed that operational resolution plans for all global systemically important banks (G-SIBs) should be developed by the end of June 2013 and resolved to address all impediments to effective home-host cooperation of resolution authorities for internationally active banks.