List of global systemically important banks (G-SIBs)
The FSB has updated its list of G-SIBs. The updated list contains 28 banks, with two additions (Standard Chartered and BBVA) and three deletions (Lloyds Banking Group, Commerzbank and Dexia) since the November 2011 list. This demonstrates the FSB's intention that this should be a dynamic list, reflecting the impact of both expansions and contractions in banks' business activities.
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.
Recovery and resolution planning
The FSB issued a consultation paper on recovery planning and resolution planning, which emphasises 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 also consider a wide range of possible critical economic functions, including deposit-taking; retail payment systems; lending; wholesale market clearing, settlement and payment systems; wholesale market activities; and capital market products and services.
Supervision of systemically important financial institutions (SIFIs)
The FSB continues to press for more intensive and effective supervision of SIFIs. The main reporting of these efforts has been through papers published in November each year since 2010, the latest of which has just appeared. These papers are important for financial institutions because they indicate where supervisory efforts may be focused over the next few years.
The November 2011 paper covered data aggregation (the data and IT systems to support risk management); the accuracy, integrity, completeness, timeliness and adaptability of data; and the need for SIFIs to have a strong (not just satisfactory) risk management function, including the role of the Chief Risk Officer.
The November 2012 paper focuses on a different set of issues, namely the need for supervisors to:
- Increase their interactions with the Boards of SIFIs;
- Make formal assessments of risk culture in SIFIs;
- Consider whether they have moved too far in concentrating on capital adequacy and controls systems, and whether they need to look more closely at SIFIs' sources of profits and financial data;
- Enhance their analysis and assessment of operational risk (in part because some SIFIs are shifting into private wealth management and related activities); and
- Increase the effectiveness of supervisory colleges.
The FSB published its fourth update on OTC derivatives, concluding that:
- The development of market infrastructure does not appear to be an impediment to further progress in meeting the G20 commitments for OTC derivatives trading, central clearing and reporting. All jurisdictions should be able to implement their regulatory approach to central clearing.
- Regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure. Jurisdictions should put in place their legislation and regulation promptly and in a form flexible enough to respond to cross-border consistency and other issues that may arise. Regulators need to act by end-2012 to identify conflicts, inconsistencies and gaps in their respective national frameworks, including in the cross-border application of rules.
- Further clarity and consensus regarding "standardisation" is needed in order to reduce the risk of regulatory arbitrage in the application of central clearing and organised platform trading requirements.
- Increased standardisation of products and processes facilitates use of market infrastructures. Industry, with the support of regulators, should accelerate their work on issues relating to the standardisation of both products and processes.
- Significant data gaps remain concerning the extent of reporting and central clearing of products, in particular for the commodities, equities and foreign exchange asset classes. There is a risk that, absent additional efforts to coordinate use of compatible data formats necessary for reconciliation, data could remain fragmented within and across jurisdictions.
On 18 November, the Financial Stability Board (FSB) issued a series of papers on shadow banking. These follow the main areas they identified for further work in October 2011 and focus on:
- Asking the Basel Committee on Banking Supervision to consider the need for further measures to constrain banks' interactions with the shadow banking sector;
- Endorsing the recommendations of the International Organisation of Securities Commissions (IOSCO) on money market funds (MMFs), including the conversion of stable net asset value funds into variable net asset funds;
- Endorsing the IOSCO recommendations on securitisations, including risk retention and disclosure;
- Consulting on proposals for securities lending and repos; and
- Consulting on how to identify other shadow banking activities, and on a policy framework to address the risks arising from these activities.
Implications for firms
Although the FSB has not identified any new areas of focus on shadow banking, their thinking is moving towards more regulatory requirements being placed on financial institutions.
- Banks will face increased capital and large exposure requirements on their exposures to non-banks; enhanced regulatory reporting and market disclosure requirements; and greater restrictions on their securitisation, securities lending and repo activities.
- This will increase the cost to banks of activities that either interact with the shadow banking sector directly or are regarded by the authorities as being equivalent to 'in-house' shadow banking.
- There could, however, be an advantage for banks if the authorities impose restrictions on non-bank financial institutions, since this will protect the banks to some extent from regulatory arbitrage – and from competition from non-banks.
- Money market funds would have to make major changes to their business model, or face the costs of much tougher capital and liquidity requirements if the proposals are carried through.
- Across financial services, the implementation of these shadow banking proposals by national authorities will almost certainly result in significant differences across jurisdictions, leading to cross-border regulatory arbitrage.
- End-users of both banks and non-banks will face higher costs and more limited availability of financial products and services.
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