Are Globally Systemically Important Banks (G-SIBs) Still at Risk?

July 29, 2015Bankingby Deena Zaidi

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The Fed orders G-SIBs to 'strengthen their capital position'.

Ever since the 2008 financial crisis, the Federal Reserve Board has been trying to regulate big banks that pose huge systemic risk to the economy. The financial crisis highlighted the fact that big banks were taking more risks for which they were not prepared.  Some banks were so big that if allowed to fail, they could have taken down the entire financial system with them.

Hence bailing them out was one of the solutions to avoid the systemic risk. One of the biggest criticisms that regulators faced during 2008 crisis was the bailout policy of the big banks. It was believed that the Troubled Asset Relief Program (TARP), spent $700 billion in taxpayers' money to bail out banks after the financial crisis.

After the crisis, the government regulators adopted various measures so as to avoid the bailout of these banks in case of any future financial mishaps. One of the measures was to impose stricter capital requirements.

This method would help the big banks to provide capital buffer against any future crisis so that bailouts would not be required. Another thought behind this method was that it might force certain big banks to break up into smaller units, which could simplify the assessment of risk.

Currently, globally systemic important banks (better known as G-SIBs) face stress tests and stringent capital controls but many critics argue that not much has changed in their size and risk appetite. A study in 2013 by Systemic Risk Council found that G-SIBs are not only huge but the complexity in their structure could lead to greater difficulties in case of liquidation.

After the crisis, G-SIBs were identified time and again to regulate their capital requirement and introduce stricter norms so that there failure does not trigger a crisis in the future. In 2014, Financial Stability Board updated its list of G-SIBs (see table 1), identifying 30 banks across the world.

In 2014, the Financial Stability Board said that the G-SIBs should hold 16 percent to 20 percent of their total assets, in the future. With higher capital requirement for G-SIBs, it was argued that they still continue to remain complex and opaque. The banks complained that with the new requirements it would be very difficult for them to earn profits.

However, Federal Reserve Chairman Janet Yellen told the House Financial Services Committee that the rules would slowly address the TBTF issue. She said “We’re beginning to see discussions that these capital charges are sufficiently large it’s causing those firms to think seriously about whether or not they should spin off some of their enterprises to reduce their systemic footprint.”

In 2015, the Financial Stability Board’s proposal for G-SIBs ensured that the shutting down of the key subsidiaries of the G-SIBs is done in an organized way without the taxpayer bailout. The larger banks might not be receptive to internal regulatory reform since they already face Sen. Bernie Sander’s assertive attitude towards strong emphasis for banking market reform.

The new legislation supported by Sen. Bernie Sanders would to break up big banks into smaller units to make them more manageable. Eventually, a Final Rule was approved by the Federal Reserve Board on the fifth anniversary of Dodd-Frank Wall Street Reform and Consumer Protection Act that allowed an additional risk-based capital surcharge on eight US G-SIBs. The final rule requires globally systemically important bank holding company to ‘strengthen their capital positions’.

The eight U.S. firms that are currently expected to be identified as G-SIBs under the final rule are Bank of America Corporation; The Bank of New York Mellon Corporation; Citigroup, Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company. The additional surcharge ranges from 1 percent to 4.5 percent and could be a positive step by the Federal Reserve.

Table 1:  30 GSIBs identified by Financial Stability Board in 2014

 

G-SIBs BANKS

COUNTRY

REGION

1

Mizuho FG

Japan

Asia

2

Sumitomo Mitsui

Japan

Asia

3

Mitsubishi UFJ FG

Japan

Asia

4

Bank of China

 China

Asia

5

ICBC

 China

Asia

6

Agricultural Bank of China

 China

Asia

7

BNP Paribas

 France

Europe

8

Crédit Agricole

 France

Europe

9

Banque Populaire CE

 France

Europe

10

Société Générale

 France

Europe

11

Deutsche Bank

Germany

Europe

12

Unicredit Group

 Italy

Europe

13

ING Bank

 Netherlands

Europe

14

Banco Bilbao Vizcaya Argentaria

 Spain

Europe

15

Santander

 Spain

Europe

16

Nordea

 Sweden

Europe

17

Credit Suisse

 Switzerland

Europe

18

UBS

 Switzerland

Europe

19

Royal Bank of Scotland

 United Kingdom

Europe

20

Barclays

 United Kingdom

Europe

21

HSBC

 United Kingdom

Europe

22

Standard Chartered

 United Kingdom

Europe

23

Bank of America

 USA

North America

24

Bank of New York Mellon

 USA

North America

25

Citigroup

 USA

North America

26

Goldman Sachs

 USA

North America

27

JP Morgan Chase

 USA

North America

28

Morgan Stanley

 USA

North America

29

State Street

 USA

North America

30

Wells Fargo

 USA

North America

 

According to USA Today,  ‘the surcharge will be a function of how big the bank is and how much it uses short term loans to fund long term investments.’

The final rule released by the Federal Reserve should ensure that the capital cushion maintained by G-SIBs offsets the cost of its failure in an event of a future financial crisis. While the rule sounds very positive and constructive in its approach, it is even more important that it is implemented in a systematic fashion and on time.