A general definition of Systemic
Risk which is not limited by its mathematical approaches, model assumptions or
focus on one institution; and which is also the first operationalizable
definition of Systemic Risk encompassing the systemic character of financial,
political, environmental, and many other risks is available since 2010.[1]
The most recent empirical
research on global Systemic Banking Crises (SBCs) has intensified the existence
of similar patterns across diverse facts. SBCs are rare events. In the SBCs the
recessions that follow are deeper and longer lasting than other recessions.[2]
SBCs follow credit intensive
booms; “banking crises are credit booms gone wrong” (see e.g., Schularick and
Taylor, 2012, p. 1032; the notion that banking crises are endogenous and follow
prosperous times are also present in Minsky, 1977).
During the recent new financial
crisis that started in 2007, and affect the hall world in 2008 the failure or
impairment of a number of large, global financial institutions sent shocks
through the financial system which, in turn, harmed the real economy.
Supervisors and other relevant authorities had limited options to prevent
problems affecting individual firms from spreading and thereby undermining
financial stability. As a consequence, public sector intervention to restore
financial stability during the crisis was necessary and conducted on a massive
scale. Both the financial and economic costs of these interventions and the
associated increase in moral hazard mean that additional measures need to be
put in place to reduce the likelihood and severity of problems that emanate
from the failure of global systemically important financial institutions
(G-SIFIs).[3]
When a financial system is hit
or threatened by widespread bank failures, as in Latin America, Scandinavia,
Southeast Asia, or Japan in the 1990s, the cost of resolving the crisis and
recapitalizing the banks can be enormous.[4]
The big global banks manage
the savings of the people of the hall world, and thus are systemically
important, meaning that they must have further supervision than other industry
or commercial companies. The Financial Stability Board, (FSB) is one of the
institutions in charge of making sure that these world systemic banks are safe.
Even though there is a resistance from world systemic banks, the FSB, along
with the BIS, are ordering them to increase the core tier 1 capital ratio (reflected
to the CAD ratio) above the minimum defined by the Basel Committee (Basel III)
to reflect their systemic significant, forcing world systemic banks to deal
with higher costs of capital, but making sure that they are safer in the
process.
1. World
Systemic Banks
In November 2011 the Financial Stability Board published an integrated
set of policy measures to address the systemic and moral hazard risks
associated with systemically important financial institutions (SIFIs). In that
publication, the FSB identified an initial group of G-SIFIs, namely 29 global
systemically important banks (G-SIBs), using a methodology developed by the
BCBS. The FSB and BCBS have updated the list of G-SIBs using end-2011 data to
28 banks. As noted in 2011, from this year, the list of G-SIBs shows their
allocation to buckets corresponding to their required level of additional loss
absorbency. Additional loss absorbency requirements for G-SIBs will be phased
in starting from 2016, initially for those banks identified as G-SIBs in
November 2014. The quality of data used in applying the identification
methodology and to allocate G-SIBs into buckets for additional loss absorbency
has improved considerably over the last year. In addition, several of the
underlying data items included in the methodology have been refined to make the
calibration more robust. The BCBS will continue to work to address remaining
data quality issues and adopt any necessary methodological refinements before the
loss absorbency requirements go into effect. The scores and the corresponding
buckets for G-SIBs are provisional and will be based in the future on the best
and most current available data prior to implementation. The group of G-SIBs
will be updated in November 2013.[5]
The FSB, in consultation with IOSCO, will finalise a proposed assessment
methodology for identifying systemically important non-bank non-insurance
financial institutions over the course of 2013.
Too Big To Fail (TBTF): Is a traditional analysis for
assessing the risk of required government intervention. The test (TBTF) can be
measured in terms of an financial institution’s size relative to the national
and international marketplace, market share concentration (using the
Herfindahl-Hirschman Index for example), and competitive barriers to entry or
how easily a financial product can be substituted.
The Basel
Committee will group G-SIBs into different categories of systemic importance
based on the score produced by the indicator-based measurement approach. GSIBs
will be initially allocated into four buckets based on their scores of systemic
importance, with varying levels of additional loss absorbency requirements
applied to the different buckets as set out in section III.A.
In January 2011
the Basel Committee collected data for end-2009 which included the indicators
of the indicator-based measurement approach from 73 banks. Sixteen of this
sample of 73 banks was chosen from the world’s largest banks on the basis of
size and supervisory judgment by Basel Committee member authorities. The Basel
Committee then produced the trial score for all banks using the methodology
described above.
Based on the
results of applying the methodology, the Basel Committee is of the view that
the number of G-SIBs will initially be 29, including two banks that have been
added based on supervisory judgment applied by the home supervisor. A tentative
cut-off point was set between the 27th and 28th banks, based on the clustering
of scores produced by the methodology. It should be noted that this number
would evolve over time as banks change their behavior in response to the
incentives of the G-SIB framework as well as other aspects of Basel III and
country specific regulations.
In deciding the threshold
for the buckets, the Basel Committee considered several dimensions. One is that
the buckets should be equal sized in terms of the scores. This will ensure the
assessments of systemic importance are comparable across time and help to give
banks incentives to reduce their systemic importance. In addition, thresholds
for the buckets should broadly correspond to the gaps identified by a cluster
analysis of the scores produced by the methodology. Another is the significance
of cliff effects in the scoring. Based on the trial scores of the banks, the
Basel Committee is of the view that four equal sized buckets between the
cut-off score and the maximum score should be set. An empty bucket will be
added on top of the highest populated bucket to provide incentives for banks to
avoid becoming more systemically important. If the empty bucket becomes
populated in the future, a new empty bucket will be added with a higher
additional loss absorbency level applied.[6]
[1] Market Dynamics & Systemic
Risk by Milan Boran June 4, 2010 23rd
Australasian Finance and Banking Conference 2010 Paper
[2]Booms
and Systemic Banking Crises Frederic Boissay, Fabrice Collard and Frank Smets : Working Paper Series No 1514/february 2013
[3]
Basel Committee on Banking
Supervision Consultative Document Global systemically important banks:
Assessment methodology and the additional loss absorbency requirement 7/2011
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