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

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.

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.