The Financial Stability Board’s latest stab at classifying banks of globally systemic importance, published on November 16, has got some analysts a bit hot under the collar.
The number of G-Sibs fell from 30 to 29 this year, making the total the same as it was when the initial list was first drawn up in 2011.
Bank of America and China Construction Bank (CCB) moved into lower categories of systemic importance, Groupe BPCE was added back into the list, while Nordea and RBS were removed altogether.
The G-Sib bucket list:
As a note published on November 19 by Scope Ratings points out (‘Is the FSB’s scorecard approach for G-Sib classification fit for purpose?’), changes to the list “are not incidental matters”, given the capital implications of moving between Buckets 1 through 5 – which carry, respectively, 1%, 1.5%, 2%, 2.5% and 3.5% of additional common equity loss absorbency as a percentage of risk-weighted assets.
Banks get some time to implement any new burdens – they have 14 months, meaning that BPCE, for example, will need to be compliant by the beginning of 2020. But changes are still disruptive.
Following the FSB’s announcement, analysts at CreditSights say that they saw an increased likelihood of the bank rethinking its approach to additional tier-1 (AT1) capital issuance, for example. BPCE has never issued any AT1 debt.
Jennifer Ray, who works in the banks team at Scope Ratings, takes particular issue with the fact that BPCE has reappeared on the 2018 G-Sib list, having dropped out of it in 2017. It had been in the list of G-Sibs since it was first drawn up in 2011.
When there has been no appreciable year-on-year difference in size, business model or strategy, “banks don’t suddenly become systemically important or stop being systemically important on a global scale,” argued Ray in a note published on November 18.
“It seems strange that Group BPCE dropped off the list last year only to reappear this year. That should really not happen.”
She also questioned why Nordea had been removed from the list: “It’s not clear what happened at Nordea to affect the bank’s G-Sib status”.
For its part, the FSB doesn’t disclose much of its detailed thinking about movements in individual institutions. This year it said merely that the changes in the allocation of the institutions to buckets reflected “the effects of changes in underlying activity of banks”. But the criteria used to judge each institution are transparent and known, and include amounts of derivatives, trading securities, Level-3 securities and cross-jurisdictional claims.
Euromoney has consulted the regulatory disclosures that BPCE makes for the purposes of G-Sib assessment; on that basis, the decision to remove the firm from the list in 2017 doesn’t appear irrational.
The bank, like all others, reports a huge number of measures grouped into a dozen top-level indicators. The data used in each year’s assessment are from the previous year-end – something that has been criticised as a weakness in the past – so the 2018 decision has been made on the basis of end-2017 data.
BPCE saw falls in nine indicators in the 2015/16 period, which would have been the data used in determining its removal from the list in 2017. But it then saw increases in seven indicators for the 2016/17 period, which would have contributed to its reappearance in 2018.
Scope doesn’t take issue with the calculations that led to BPCE’s move, but is more concerned with an over-arching approach that leads too easily to binary outcomes of being either in or out of the G-Sib list.
“I think it perhaps needs to be more long-term,” Sam Theodore, managing director of the financial institutions group at Scope, tells Euromoney. “You have the quantitative criteria at the moment, and one year an institution might no longer fit into that basis, but you shouldn’t rush to change the classification. It should be on a longer-term horizon.”
This is not the first time the topic has been considered: Euromoney understands that when the concept of a G-Sib list was first raised there was discussion at the FSB of how to include a qualitative element in addition to a quantitative one. But to do so was considered too problematic.
Scope’s call is not for that to change, but for decisions not to be made so quickly on the basis of one year’s data.
Scope’s analysts had less of a problem with RBS falling off the G-Sib list this year. In that context, RBS’s move was “perhaps more clear-cut”, according to Scope’s Pauline Lambert. After all, the bank had shrunk overall and had reduced its international and capital markets exposures over the last few years.
While speculating that politics might play a role in the FSB’s determinations as to its G-Sib list, Ray argues that the scorecard approach used by the body does not seem to be working properly as the results were volatile.
“If you are asking a bank to adopt a strategy of raising additional debt within its capital structure, that bank should be able to plan for it long term, not fall off one year and reappear the next,” she says.
As our chart of G-Sib movements shows (click here for a large version), there are a few banks that have jumped about over time. Citigroup, which started out in Bucket 4 in 2012, has moved three times since then, sliding to Bucket 3 in 2013, moving back up in 2016 and down again in 2017.
Bank of America has moved twice, rising from Bucket 2 to 3 in 2016, before falling again this year. Chinese banks CCB and ICBC joined the list in 2013 and 2015, respectively, rising up to both being in Bucket 3 in 2017, before CCB dropped back down to Bucket 2 this year.
BPCE remains the only bank to have fallen off the list and reappeared.