Global banks grow systemic footprint

Nine out of the 12 G-Sib indicators increased in 2020

The world’s largest banks grew in size, complexity and interconnectedness in 2020, data from the Basel Committee shows.

The international standard-setting body published the aggregate indicator amounts used to calculate banks’ systemic risk scores on November 23. These are the sum of the indicators of the 76 largest global banks.

 

 

There are 12 indicators spread across five broad categories: size; interconnectedness; substitutability; complexity; and cross-jurisdictional activity.

In aggregate, the big banks increased leverage exposure by €4 trillion (5%) to €85 trillion – the highest level since the framework to assess global systemically important banks (G-Sibs) was first set up in 2012.

All three indicators that make up the substitutability category rose over the period. Payments rose by €179 trillion (8%), assets under custody increased by €11 trillion (7%) and underwriting activity jumped almost €2 trillion (26%).

Cross-jurisdictional claims and liabilities, which form the cross-jurisdictional activity category, rose by €69 billion and €151 billion, respectively.

The indicators for intra-financial assets and liabilities, two-thirds of the interconnectedness category, grew by €8 billion and €373 billion, respectively. In contrast, the securities outstanding indicator – representing the other third – fell €1.4 trillion. 

The complexity category saw an increase in the Level 3 assets indicator – up €10 billion – and a reduction in the notional amount of over-the-counter derivatives and the trading and available-for-sale securities indicators – down €33 trillion and €42 billion, respectively. 

What is it?

Global systemically important banks are designated using the Basel Committee on Banking Supervision’s assessment methodology, which measures systemic risk. Each bank is given a systemic risk score found by averaging the scores of five separate indicator categories: size; interconnectedness; complexity; cross-jurisdictional activity; and substitutability. 

These scores are found by taking the indicator category amounts, expressed in euros, and dividing them by the aggregate amount for that category summed across all banks in the G-Sib sample – made up of firms with more than €200 billion ($225 billion) in leverage exposure – and multiplying the result by 10,000.

The final score is the average of the five category sub-scores, with the substitutability score capped at 500bp.

The G-Sibs are then grouped into five ‘buckets’ according to their respective scores, with the lowest scoring in bucket one and the highest in bucket five. Those firms designated as G-Sibs are subject to additional capital buffers of between 1% and 3.5% of their RWAs, depending on their score.

They are also required to stockpile bail-in-able debt and capital to meet total loss-absorbing capacity standards, and to put in place group-wide resolution plans for use in the event that they collapse.

Why it matters

In spite – or perhaps because – of the global pandemic that swept the markets early last year, the largest banks grew bigger and more intertwined. And by doing so, they became more of a systemic risk, which is ultimately the point of this annual assessment.

Of the nine indicators that increased over 2020, the 26% jump in underwriting activity stands out. This highlights how large banks took advantage of central banks stepping in in the early stages of the pandemic by pledging to buy up investment-grade securities. As corporates began to sell new, long-term debt in record amounts, the top global lenders benefited the most.

However, a couple of important caveats apply here. First, the Basel Committee’s formula means a bank could, for example, boost exposures, intra-system assets and derivatives on an absolute basis, yet see its G-Sib score stand stock still. This is because each bank’s indicator score is calculated in reference to the aggregate score.

In addition, as the indicator amounts are denominated in euros, swings in foreign exchange rates over the course of a year can also inflate or deflate a bank’s score.

Taken together, these factors mean the true risk of the world’s largest banks can be trickier to grasp.

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