Recalculating and re-examining G-SII buffers

UK Finance has responded to the Prudential Regulation Authority (PRA)’s CP 16/23 on its proposals to update the UK Technical Standards (UKTS) on the identification of global systemically important institutions (G-SIIs).

This updating consultation is required to align the UK’s approach with the recently amended Basel Committee for Banking Supervision (BCBS) methodology for identifying G-SIIs.

Read the response here

G-SIIs are banks whose failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider global financial system and worldwide economic activity. So they are required to hold higher levels of loss absorbing capacity than the minimum levels agreed in Basel III. This is achieved by requiring them to hold a G-SII buffer.

The methodology uses five equally weighted categories, themselves comprised of indictors that reflect the different aspects of what makes a bank critical for the stability of the financial system. These indicators are:

size
interconnectedness
substitutability/financial institution infrastructure
complexity
cross-jurisdictional activity

An overall score of systemic importance is derived, based on data submitted by banks to their supervisor – the PRA in the case of UK G-SII banks. This score is used to allocate each firm to a bucket, with a corresponding level of additional core equity capital buffer requirements, ranging from between one and 3.5 per cent of risk weighted assets.

In our consultation response we supported the PRA’s proposed changes to the UKTS which will align it with the updated BCBS framework by

Adding trading volume as a new ‘substitutability/financial infrastructure‘ category and the consequent updating of indicator weights
Adding insurance subsidiaries to data consolidation
Deleting the now irrelevant transitional provisions

However, we said that a more fundamental review of its now 12-year-old G-SII assessment framework by the BCBS is warranted and encouraged the PRA to promote this. We seek this wide-ranging review for the following reasons:

Resolution techniques have matured over the past decade and proven to be effective, even for the resolution of the largest failing banks. These requirements make the stabilisation of banks in resolution more achievable, reducing systemic risk. This progress should be reflected in a reduction in the magnitude of the G-SII buffer.
The methodology’s treatment of Cross-jurisdictional activity does not adequately distinguish between domestic ‘in-country’ activity in the local currency of an overseas subsidiary of a UK banking group and activity which is truly cross-border. A clear distinction should be made between cross-border activity and local claims and liabilities of overseas subsidiaries. At the very least these local claims should be evaluated net of local liabilities.
The scope of consolidation, which now will include insurance subsidiaries, creates a comparative disadvantage for bank-owned insurers. We realise that bank-owned insurers are not captured by the IAIS’s methodology for identifying globally systemically important insurers but it is not clear why the BCBS’s G-SII framework should be the mechanism for doing so.

We also noted that recently released US proposals in relation to the G-SII buffer plan to step it up and down in smaller 10 bp increments instead of 50 bp increments along with the execution of criteria assessments quarterly rather than annually to enable a more seamless approach for recognising additional capital requirements for G-SIIs.

So, while supporting the PRA’s immediate plans to update its approach we continue to encourage further evolution of the global methodology for identifying G-SIIs and suggest that the PRA should take the lead at the BCBS in making this happen.

Area of expertise:

Prudential risk, reporting and tax

Tags:

Business Finance Europe Regulation - prudential Tax