At Citi, Goldman larger OTC swaps books drive up systemic risk scores

Increase in trading and available-for-sale securities bump systemic risk scores higher at BofA and JPM

Expanding over-the-counter derivatives books at Citi and Goldman Sachs inflated their systemic scores more than any other indicator used by the Basel Committee to assess banks’ systemic risk, Risk Quantum analysis shows.

Citi reported notional amounts of OTC derivatives of $41.4 trillion at end-March, up 14.7% from three months earlier. The increase added eight basis points to the bank’s systemic score, against an 11bp increase from all other indicators combined. The OTC derivatives component accounted for 64bp of the bank’s 684bp systemic score in Q1, compared with 56bp out of 665bp in Q4 2020.



At Goldman Sachs, OTC derivatives notionals ballooned 18.9% to $42.4 trillion over the period. The associated risk score increased by 10bp, out of a total 52bp rise across the indicator gamut. Derivatives weighted for 65bp on the 607bp total score, up from 55bp out of 555bp three months prior.

Though the OTC derivatives indicator blinked higher at five other US global systemically important banks, other indicators were more responsible for their higher systemic risk scores.



At Bank of America and JP Morgan, higher volumes of trading and available-for-sale securities bit the hardest, making up 23bp and 19bp of the respective 72bp and 80bp quarterly surges in systemic scores.

Morgan Stanley, BNY Mellon and State Street paid the price of a higher reliance on short-term wholesale funding – an indicator specific to the Fed’s implementation of the Basel-set formulas – which added 10bp, 9bp and 2bp to their respective scores.

At Wells Fargo, the component that lurched up the most were intra-financial system assets, which added 4bp to the all-round score.

What is it?

US G-Sibs are designated using the Basel Committee’s assessment methodology to gauge systemic risk. The total score is found by averaging the scores of five systemic indicator categories: size; interconnectedness; complexity; cross-jurisdictional activity; and substitutability.

The Federal Reserve uses its own measure, known as Method 2, which uses a different calculation formula, deriving a G-Sib score from the sum of the first four indicator categories above, plus a short-term wholesale funding factor. Individual indicator values are multiplied by fixed coefficients to produce a final G-Sib score. These Method 2 scores are calculated quarterly, but only the year-end score is used to set each bank’s capital surcharge for the following year but one.

The G-Sib surcharge applied to designated firms is the higher of that determined by the Basel Committee’s methodology and by the Fed. Under both methods, the higher the score, the higher the G-Sib surcharge, which currently ranges from 1–3.5% under Method 1, and from 1–4% under Method 2.

Why it matters

The annual first-quarter rally in OTC notionals is a well-known feature of the US too-big-to-fail regime. Banks tend to compress their derivatives books towards the year-end, in order to show up in lean form when regulators review their G-Sib scores in November. After the assessment, they lift brakes, allowing business to return to more regular levels.

This year, there have been signs of that tried-and-tested strategy losing some steam. The eight US G-Sibs cut notional by 9% between the third and the fourth quarter of 2020, compared with a 16% drop the year before - although it should be noted they started trimming their books earlier last year, likely spurred by pandemic-driven uncertainty.

Still, between ‘meme stock’ gyrations and policy rate guessing games, the first few months of 2021 have shown how quickly derivatives books can build up. Either broker-dealers follow 2020’s cue and take precautionary early action on book size, or notionals may prove too bloated not to feed into their G-Sib scores come November.

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