Banks’ G-Sibs criticism summarised
Author: | Published: 18 Sep 2011
International banks have attacked the Basel Committee on
Banking Supervision’s (BCBS’s)
proposed methodology for calculating the globally systemically
important banks (G-Sibs) for its lack of transparency and focus
on sheer size.
In their responses to the BCBS consultation
paper on the methodology for calculating the G-Sibs
surcharge, many banks were concerned about the lack of
transparency of the actual criteria to determine the systemic
importance of banks.
BNP Paribas said the reason for the selection of the 73
systemic banks in the sample is not spelt out and
doesn’t even cover all the banking systems of the
"The range and number of buckets used to adjust the surcharge
to the so-called systemic profile do not appear to have
scientific grounds and cannot easily be reconstructed," said
BNP Paribas in a written response.
"Designing and adopting a regulation distinguishing 28 banks in
four buckets out of an undefined sample of 73 banks, without a
clear updating pattern, will be, in this context, a formidable
if not insurmountable legal challenge," it added.
Goldman Sachs called for more clarity for the methodology for
calculating the so-called scorecard and for translating it into
the additional loss absorbency bands.
In the bank’s response, chief financial officer
David Viniar said that a transparent methodology would give
banks the incentive to consider the potential consequences of a
given action on their G-Sib banding.
Barclays in turn called for more clarity regarding the entry
and exit criteria for G-Sib status to address potential mergers
and financial sector growth in emerging economies.
Size v RWA
Banks had a particular concern with the BCBS’s
focus on sheer size to calculate the systemic importance of a
Size has a 20% weighting on the calculation of whether a bank
is classed as a G-Sib, and is described as "total exposures as
defined for use in the Basel III leverage ratio".
"The criterion of size is probably the most problematic on the
list of criteria used by the BCBS," said BNP Paribas.
In HSBC’s response, group chairman Douglas Flint
argued that there are a number of other measures heavily
correlated to the total size of an institution.
BNP Paribas said the calculations used for the substitutability
and complexity criteria are similar, and may lead to double
counting. This, said the bank, can overweight the impact of
size in the final result "well beyond the 20% stated".
UBS group chief risk officer Maureen Miskovic and the head of
group government affairs Steve Hottiger, were concerned about
the omission of risk-weighted assets (RWA) when calculating
"The absence of RWA as an indicator and focus on total exposure
only as a proxy for size is, in our perspective, questionable,"
RWA is the main concept of the Basel Committee and is
calculated by every institution to reflect the risk profile of
the bank. It is also the proxy for transferring risky assets
during bankruptcy and resolution, they note.
"Hence, taking RWA into account within the size indicator would
better quantify the risks of a bank’s distress or
failure to the global economy."
In its response, Barclays suggested the size criteria should
include risk-adjusted capital ratios alongside the non-risk
adjusted Basel III leverage ratios.
The cross-jurisdictional criteria also concerned the banks. The
criteria, which has a 20% weighting, measures
cross-jurisdictional claims and liabilities to measure the
importance of the bank’s activities outside its
home jurisdiction relative to overall activity of other banks.
"The greater the global reach of a bank, the more difficult it
is to coordinate its resolution and the more widespread the
spill over effects from its failure," the BCBS consultation
David Viniar of Goldman Sachs said the bank was concerned that
these measurements are much more complex and open to
interpretation than it would first appear. This, he said, is
likely to result in differences in reporting methodologies.
In Citigroup’s response, chief risk officer Brian
Leach said that such a blunt measure of international activity
does not measure the probability of failure or potential for
systemic disruption, and instead discourages global
Leach explained that if a bank that funds its local currency
assets in each host country through cross-border financing, it
will have half the risk score than if they had funded them with
local currency liabilities and capital.
"This is at odds with the industry’s, including
Citi’s, experiences over recent decades to closely
manage, and in some cases reduce, cross-border exposure to
guard against the risk of disruptions to liquidity flows during
times of stress and the potential for government actions," said
Diversified and cross-border activities are the only new
factors that may be viewed as supporting the capital surcharge,
said BNP Paribas. But until now these characteristics were
considered as the basis of sound banking.
"This dramatic change in the risk management paradigm is
amazing and not seriously explained," added BNP Paribas.
Goldman Sachs’s Viniar suggested the use of
alternative indicators such as non-domestic revenue as a
proportion of total revenue, or non-domestic balance sheet as a
proportion of the total balance sheet.
"This information is already disclosed in quarterly or annual
filings and, since it is audited, out concerns regarding data
integrity and consistency are greatly mitigated," he said.
UBS and HSBC both called for the calculation to take into
account the existence of a credible recovery and resolution
regime in its home country.
Miskovic and Hottiger of UBS said that given that the surcharge
is based in part on a desire to reduce negative externalities
caused by the failure of a G-Sib, the existence of an effective
and credible recovery and resolution plans can reduce these
externalities to a certain extent.
"It is in our perspective logical that G-Sibs based in that
country should have their total scores reduced," said Miskovic
Douglas Flint of HSBC explained that the bank already operates
as a series of locally regulated banks that are separately
capitalised with their own pools of liquidity and funding.
This structure, said Flint, would give authorities significant
advantages in resolution as they could effectively ringfence
large areas of the group that could continue in business in the
event that other parts of the group were to fail.
This structure however has significant costs and puts pressure
on returns, which Flint believes should be compensated through
the G-Sib proposals or elsewhere in the regulatory system in
order to incentivise other banks to adopt similar
The consultation paper was released on July 19 and the comments
closed on August 26.