New Data Highlight Changes in Systemic Risk Posed by U.S. and Chinese Banks
Published: December 14, 2016
Three of the biggest U.S. banks have moved up in systemic risk ratings, according to new international data the OFR added today to its online interactive chart.
The risk ratings of Chinese banks also rose, continuing a three-year trend.
By shedding light on changes in banks’ systemic importance indicators, the OFR’s interactive chart increases the transparency of the process for identifying global systemically important banks (G-SIBs).
The Basel Committee on Banking Supervision updates G-SIBs’ systemic risk scores annually. Based on these scores, the banks are assigned to buckets. National supervisors use these buckets to determine how much additional capital each bank must hold. This extra capital is meant to reduce the risk of default by the largest banks. An OFR brief published in April 2016 contains a detailed analysis of this methodology.
The new data show that Bank of America, Citigroup, Industrial and Commercial Bank of China, and Wells Fargo each moved up a bucket. Barclays, HSBC, and Morgan Stanley moved down a bucket. The list of banks identified as G-SIBs remained unchanged. Of the 30 global G-SIBS, eight are U.S. banks.
The data extend for a third year the upward trend in the systemic importance scores of China’s G-SIBs. Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China each have received higher scores every year since 2013. However, the largest U.S. banks have notably higher systemic importance scores than any Chinese bank and face the largest capital surcharges under the Basel framework.
The international comparisons have three features worth noting. First, comparing U.S. and foreign banks can be difficult due to differences in accounting standards. However, the G-SIB data are especially valuable because they allow for international comparisons.
Second, currency fluctuations can have a significant impact on bank scores under the Basel methodology. If exchange rates had remained unchanged from 2014, Bank of America, Citigroup, and Wells Fargo would not have moved up a bucket. (This effect is discussed in an earlier OFR brief.
Third, the Basel bucketing methodology allows for cliff effects in banks’ movements between buckets. If a bank’s score is close to its bucket’s high or low threshold, a small change in score could move the bank to another bucket. If a bank’s score is far from a threshold, a big change in score might not move the bank to another bucket.
For example, from 2014 to 2015, China Construction Bank’s score increased by more than 42 basis points. But that change was not enough to push the bank into the next more risky bucket. As a result, the increase did not raise the bank’s capital requirement.
In contrast, Citigroup’s score increased by fewer than four basis points. But Citigroup moved up to the next more risky bucket because it was already close to the threshold. Scores for Groupe BPCE and Royal Bank of Scotland declined steeply, but not enough to push them out of the lowest-risk bucket, so they remain G-SIBs.
Although the new data show how U.S. banks rank internationally, some U.S. banks face higher capital surcharges than the Basel methodology dictates. This is because U.S. supervisors have adopted a modified methodology for U.S. banks. The U.S. rule uses both the Basel methodology and an alternative formula, and then applies the higher of the two results to determine a bank’s capital surcharge.
Implementation of the U.S. G-SIB capital surcharge began in January 2016. The requirements will be fully phased in by 2019.
Stacey Schreft is the Deputy Director for Research and Analysis at the Office of Financial Research