A Comparison Of U.S. And International G-SIBs by OFR
by Paul Glasserman and Bert Loudis
The authors find that the largest U.S. banks rank relatively high on systemic importance based on measures of size, interconnectedness, complexity, cross-jurisdictional activity, and the provision of services with limited substitutes. These systemic importance indicators are intended to measure the threat to global financial stability that a large bank would pose if it were to fail. U.S. banks particularly dominate the complexity and substitutability categories. Banks with higher systemic importance scores do not consistently have higher risk-based capital ratios, despite the importance of capital as a buffer against the failure of systemically important institutions. Fluctuations in exchange rates can have a significant impact on these scores, which is a potential weakness of the methodology.
This brief examines a set of systemic importance indicators established by the Basel Committee on Banking Supervision (Basel Committee) and compares the largest U.S. banks with the largest foreign banks. Overall, these indicators show the largest U.S. banks rank quite high in systemic importance and dominate certain indicators of systemic importance. The banks we consider are those identified by the Basel Committee as global systemically important banks (G-SIBs). These are large, complex, internationally active banks whose failure could create cross-border spillover risks. The G-SIB identification is made by national banking supervision authorities, primarily based on a scorecard of systemic importance indicators established through the Basel Committee in 2011 and implemented in each jurisdiction.2 An earlier OFR brief examined the systemic importance scoring method and analyzed the scores of all U.S. banks required to report their indicators.3 The earlier brief found that among U.S. banks with more than $50 billion in assets, the systemic importance indicators are heavily dominated by the very largest banks. This companion brief focuses on the G-SIBs with an international analysis. There are currently 8 U.S. banks identified as G-SIBs and 22 G-SIBs in other countries.
Overall, we find that the U.S. banks rank high on measures of systemic importance. The three largest U.S. banks rank high across multiple measures of systemic importance. Two categories of systemic importance — substitutability and complexity — are dominated by U.S. banks. We find that banks with higher systemic importance scores do not consistently have higher levels of risk-based capital. We also highlight the effect of exchange rates in making international comparisons and their potential impact on the Basel Committee’s recommended capital surcharges for G-SIBs.
The analysis described here is consistent with the Basel Committee’s methodology. The Basel Committee’s scoring methodology is intended to measure the threat to global financial stability that a G-SIB would pose if it were to fail. Once adopted in a national jurisdiction, the result is a capital add-on intended to reflect these global threats. The Federal Reserve Board recently adopted this methodology to determine which U.S. banks are G-SIBs. The final U.S. rule uses both the Basel Committee methodology (referred to as Method 1) and an alternative formula (referred to as Method 2), then uses the higher of the two surcharges as the add-on requirement. Method 2 replaces some indicators with new metrics, not yet publicly reported by banks.
Systemic Importance Indicators and Scores
The Basel Committee methodology for G-SIB designation uses 12 indicators of systemic importance, grouped into five categories:
- Size, measured through total exposures. This is a more comprehensive measure than total assets, and it is measured consistently across jurisdictions, whereas the measurement of assets varies with national accounting standards.
- Interconnectedness, measured through a bank’s intrafinancial system assets, intrafinancial system liabilities, and total securities outstanding.
- Substitutability, or the extent to which a bank provides important financial infrastructure that would be difficult to replace if the bank were to fail. It is measured through payments activity, assets under custody, and underwriting activity.
- Complexity, measured through a bank’s over-the-counter derivatives activity, trading and available-for-sale assets, and holdings of less liquid assets.
- Cross-jurisdictional activity, measured through a bank’s foreign claims and total cross-jurisdictional liabilities.
Each of the 12 indicators is scored on a scale from zero to 100 percent by taking a bank’s reported value and dividing it by the total value across a panel of 75 banks.6 The 12 indicator scores are then combined into an overall score. For details of this procedure, see the recent OFR brief 7 or the Basel Committee’s G-SIB methodology.8 Our analysis is based on year-end 2013 values, the most recent date for which all data necessary for the calculations are available.
The systemic importance scores for the 30 G-SIBs are calculated by applying the Basel Committee methodology to indicator values publicly disclosed by the banks on their websites (see Figure 1).9 The overall scores can be grouped by region with cutoffs for the “bucket” to which each bank would be assigned under the methodology, based on the bank’s overall score (see Figure 2). The figure also shows the score bands that define the buckets. Two banks in Figure 1 have overall scores that fall below the minimum for the lowest bucket — Nordea Bank AB (Sweden) and Banco Bilbao Vizcaya Argentaria S.A. (Spain). These banks were identified as G-SIBs based on additional factors introduced by their national supervisors.
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