Updated Bank Data Show Rising Systemic Importance of Asian Banks

Updated Bank Data Show Rising Systemic Importance of Asian Banks

New data on the world’s largest banks show the increasing systemic importance of Asian banks. The data also show that U.S. banks’ systemic footprint still dominates the global totals. Indeed, eight U.S. banks are still considered global systemically important banks (G-SIBs). G-SIBs must hold more capital than other banks. Among the U.S. banks in the tier below G-SIBs, the U.S. operations of a few foreign banks rank as the most systemically important.

The Basel Committee on Banking Supervision has developed a methodology for identifying G-SIBs and standards requiring them to hold more capital. The Basel Committee on Banking Supervision updates the data used in that methodology annually. The 2016 data were released in late November. The OFR used the data to update its online G-SIB Scores Interactive Chart. We also updated figures showing the relative systemic importance of U.S. G-SIBs and 32 other U.S. banks that report the data. Earlier versions of the figures appeared in our October viewpoint, “Size Alone is Not Sufficient to Identify Systemically Important Banks.”

Based on these scores, the G-SIBs are assigned to buckets. National supervisors, including the Federal Reserve, use these buckets to determine how much more capital each bank must hold. This extra capital is meant to reduce banks’ risk of default.

The systemic importance scores of several Asian banks rose for the second year in a row. The scores of Bank of China and China Construction Bank rose enough to put them in a higher capital bucket because of their increased interconnectedness and complexity. As a result, those banks will face higher capital requirements. The systemic importance scores for three Japanese G-SIBs and for Dutch-based ING went up more than the score of the Bank of China. However, their capital requirements will not change because they did not move to different buckets.

The Basel Committee developed the systemic importance methodology to score banks on size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity. Thirty banks globally, including eight U.S. banks, rank as G-SIBs. In the United States, shifts in most G-SIBs’ systemic importance scores were modest. Citigroup’s score and capital requirement decreased from last year because the bank rated as less interconnected and complex. JPMorgan Chase & Co.’s systemic importance score remains the world’s highest.

The composition of the overall list changed as well. Royal Bank of Canada was added; it is the first Canadian bank to be designated as a G-SIB. France’s Groupe BPCE was dropped from the list.

For U.S. non-G-SIB banks, the data continue to support the use of systemic importance metrics rather than asset size alone to set thresholds for heightened regulation. Additionally, a bank’s systemic importance is more desirable to use as a regulatory threshold than asset size alone, which could affect bank lending. Today, some U.S. regulations use a $50 billion asset-size threshold to identify U.S. banks that warrant enhanced prudential regulation. Legislation is pending to instead use systemic importance metrics to identify U.S. banks that are not G-SIBs for enhanced regulation.

The disconnect between size and systemic importance is particularly evident in the data on foreign banks’ U.S. operations. The U.S. operations of foreign banks tend to be more complex and more active in capital markets than U.S. banks of comparable asset size. For example, the U.S. operations of Credit Suisse, Deutsche Bank, and Barclays have the three highest Basel Committee systemic importance scores of non-G-SIB U.S. banks. Yet, these firms rank lower — 8th, 11th, and 10th — in asset size among non-G-SIB U.S. banks. Capital One is larger by assets than seven foreign banks’ U.S. operations with systemic importance scores higher than Capital One’s.

The updated figures also show our analysis of six measures of systemic importance and systemic risk discussed in the OFR viewpoint. That analysis further highlights the value of considering multiple systemic indicators, not just size. For instance, JPMorgan ranked first or second among U.S. banks according to five of the six measures. However, its SRISK, a market-based systemic risk measure, was negligible.

Stacey Schreft is the Deputy Director for Research and Analysis at the Office of Financial Research.