The updated list of G-SIBs contains 28 banks, with two additions (Standard Chartered and BBVA) and three deletions (Lloyds Banking Group, Commerzbank and Dexia) since the November 2011 list.
The list also allocates capital surcharges to each of the 28 banks, with four banks at the 2.5% level – Citigroup, Deutsche Bank, HSBC and JP Morgan Chase. The 3.5% surcharge level remains empty. However, these additional loss absorbency requirements remain illustrative at this stage – actual surcharges will not begin to be applied until January 2016 (with full implementation by January 2019), for G-SIBs identified in November 2014.
Although the capital surcharges do not yet apply, G-SIBs (and banks that are no longer designated as G-SIBs but remain as domestic SIBs) are expected to meet requirements for recovery and resolution planning. Meanwhile, G-SIBs designated in November 2011 or November 2012 must meet the higher expectations for data aggregation capabilities and risk reporting by January 2016, while G-SIBs designated in subsequent annual updates will need to meet these higher expectations within three years of the designation.
The FSB Consultation on recovery planning and resolution planning makes clear that:
- Banks' recovery plans should be based on a wide range of idiosyncratic and market-wide stress tests and scenarios, including reverse stress tests.
- Banks should develop a set of both quantitative and qualitative triggers for recovery actions, and specify to the authorities what actions would be taken in response to each trigger.
- In developing resolution strategies, the authorities should consider (but not be limited to) two broad alternative approaches – the "single point of entry" based on the application of resolution tools, including bail-in liabilities, at a holding company level; and the "multiple points of entry" based on the resolution of both parent and subsidiary entities within a group.
- The authorities should consider the systemic importance of a wide range of possible critical economic functions when preparing resolution plans. These should include not just deposit-taking and retail payment systems but also lending; wholesale market clearing, settlement and payment systems; wholesale market activities; and capital market products and services.
Implications for firms
Even if these latest FSB papers do not contain much that is completely new or surprising, firms should take note of:
- The dynamic nature of the list of G-SIBs. This list is not cast in stone, with both inclusion on the list and the prospective capital surcharge reflecting changes in a major bank's size, complexity and global reach (be it reductions through deleveraging and asset sales, or increases through continuing growth).
- The FSB's determination that systemically important firms (not just banks but any insurers, financial market infrastructure and other financial services firms deemed to be of systemic importance) should be subject not only to capital surcharges but also to tougher recovery and resolution planning, higher standards of risk management and more intensive supervision.
- The FSB's view that firms no longer designated to be of global systemic importance are still likely to be of domestic systemic importance (the so called D-SIFIs) – and that as a result they will continue to be subject to much the same requirements. Indeed, despite leaving most of the detail to national discretion, the FSB clearly wants national authorities to be specific and transparent about the designation of domestic systemically important firms and about the requirements that are applied to them.
- Disclosing the prospective capital surcharges on G-SIBs will increase the pressure on national authorities to reveal whatever capital surcharges they apply in due course to D-SIBs.
- The as yet unanswered question of how investors, depositors, market analysts and credit rating agencies will view a firm that is deemed to be of global (or domestic) systemic importance. What will the impact be on the costs of funding and of capital, and on credit ratings? And will this result in a net increase or reduction in overall costs, taking account of both the market response and the costs of tougher regulatory requirements?
- The FSB's approach to recovery planning will impose tough requirements on the role of stress testing and on the need for firms to develop specific triggers and resulting action points as part of recovery planning.
- The FSB's very broad approach to the identification of critical economic functions may lead to wide-ranging requirements on firms to adjust their legal and operational structures to enable the continuity of these functions to be preserved more easily under a resolution.
- The continuing trend towards the local ring-fencing of overseas operations by host authorities – not least as a means of strengthening the position of the host country in the event of a resolution of a global banking group.