What happens when a bank drops off the systemic risk radar?

If a bank falls and nobody’s around to hear it, does global systemic risk rise?

For the first time in 10 years, Russia’s largest lender Sberbank didn’t take part in the latest assessment of global systemically important banks (G-Sibs) or publish relevant indicators for the end of 2021. It’s not clear whether the Basel Committee for Banking Supervision intentionally excluded the bank from the assessment, or whether the bank and its supervisor failed to provide the data – as ostensibly allowed by Kremlin decrees following western sanctions against the country.

Regardless, it deprives regulators, academics, analysts and journalists of the most granular and reliable data publicly available for the bank.

But the risk intrinsic to Sberbank hasn’t simply vanished from the global financial system.

Sberbank had been included in the Basel Committee’s assessment sample, which is made up of the top 75 banks globally by leverage exposures plus other banks at regulators’ discretion. However, it never came close to being designated a systemic lender. In annual tests, its overall G-Sib score averaged 35 basis points, hitting just 30bp in the November 2021 assessment – barely one-quarter of the 130bp minimum that would require designation. That gave it roughly as risky a global profile as Korea’s NongHyup or State Bank of India.

But though no Citi or even Nomura, Sberbank was still deemed large enough by regulators for benchmarking – meaning the systemic risk it posed warranted at the very least monitoring, if not a surcharge to the bank’s Common Equity Tier 1 capital adequacy. Sberbank’s cross-jurisdictional exposures totalled a non-negligible €77 billion ($80 billion) at end-2020, and its trove of over-the-counter derivatives stood at €183 billion.

The West, and especially Europe, has already had a taste of how difficult it is – if not outright impossible – to prevent sanctions fallout from stopping at the border. Albeit a large swath of exposures impacted by sanctions has been written off, unwound or simply offloaded, some banks, most notably UniCredit and Raiffeisen Bank International, are still extricating themselves from positions with Russian counterparties, of which Sberbank is no doubt among the largest. In the US, Citi saw exposures to Russia balloon overnight after deeming the Russian legal system could not be trusted to enforce netting agreements.

More dramatically, in March, even with Sberbank hitherto spared from the worst of the financial sanctions, its Vienna-headquartered central and eastern European franchise collapsed as it was drained of liquid funds. Although the situation was eventually defused, with the franchise being wound down by the Single Resolution Board, there was no telling at the outset how much further into the European financial system the tremors would travel.

In a way, Basel’s G-Sib methodology did compensate for Sberbank’s absence by keeping the sample constant at 76 banks, the same as 2021’s exercise. Specifically, Sberbank, Woori Bank and ABN Amro were replaced by La Banque Postale, Bank of Jiangsu and Bank of Shanghai.

This prevented, to an extent, a sudden fall in the aggregate values that are used as benchmarking denominators. But systemic risk is not a fungible property. Risks intrinsic to Sberbank won’t be captured by benchmarking a similar-sized French or Chinese lender in its place.

Some commentators see Russian banks’ expulsion from global finance as a testbed for how the US and allies may sanction China’s lenders amid a geopolitical rupture – for instance over an invasion of Taiwan. If the same kind of communication breakdown between the Basel Committee and the People’s Bank of China ensued, regulators would have to think very carefully about how they’d keep monitoring the systemic risk of Chinese banks, which accounted for 31% of the latest exercise’s aggregate leverage exposure indicator.

Extricating a major bank from today’s globalised financial system is not like isolating a portion of an electric grid. It is a largely untested, messy and fuzzy disconnection process – one that would thereafter require constant monitoring against unexpected power surges.