What’s Finnish for ‘too big to fail’?

Strange case of Nordea highlights a flaw in G-Sib assessments

Since 2014, November has played host to the season finale of the regulatory year: the annual designation of global systemically important banks (G-Sibs). During this month, the Financial Stability Board issues its league table of lenders whose failure could blow a hole in the global financial system. Those featured are subject to more stringent supervision than their peers and hit with capital add-ons in proportion to the threat they pose.

Just like in a sports league table, a bank’s ranking in the G-Sib hierarchy is determined by its points total. The larger, more interconnected and complex it is, the higher its score – and the greater its mandatory capital buffer. However, the banking industry’s referees – national regulators – can step in to amend a lender’s final score higher or lower after the results have been tallied, adding a dash of political intrigue to the annual G-Sib reveal.

It’s possible to glimpse such gerrymandering by replicating the methodology cooked up by the Basel Committee on Banking Supervision to score the G-Sibs, and applying it to banks’ public data. Only banks with a score of more than 130 basis points are supposed to qualify as G-Sibs. Yet the Basel assessment criteria states that in “exceptional, egregious cases” supervisory judgement can supersede the scoring methodology.

This override may have been used in the case of Nordea, which this year was relegated from the G-Sib table having cut exposures and payments activity in 2017. Yet should it have exited earlier? The Scandinavian bank’s G-Sib score was 118bp this year, well below the threshold, but it was also short of the 130bp cut-off each year going back to 2014 and still featured in the annual G-Sib lists.

The Basel Committee did not respond to a request to clarify Nordea’s scoring, so we can but guess why it only left the G-Sib club in 2018. One possibility is that the final data used to compute the G-Sib scores each August differ from that publicly disclosed. Basel itself says this can be the source of certain discrepancies, but that such differences are not material to banks’ scores.

The other possibility is that Nordea’s supervisor, which was the Swedish watchdog Finansinspektionen prior to its move this year to Finland, judged that the bank posed more of a systemic risk than Basel’s scoring methodology implied, and petitioned for it to be included in the G-Sib club regardless. Maybe the European Central Bank, its new supervisor, feels differently.

Perhaps the qualitative basis on which its supervisor judged Nordea to be a systemic threat fell away this year, or the bank itself made a successful case that the Basel scoring methodology on its own accurately reflected its riskiness. Either way, the fact remains that Nordea’s G-Sib score barely budged year to year, but in 2017 it was a systemic risk and today it is not.

The assessment criteria allows this; but perhaps, when judgement is used, it should also be explained.

Correction, December 21 2018: A previous version of this article referred to the Finnish regulator as Nordea’s new supervisor. Nordea’s new supervisor is the European Central Bank.