Featured Product

    ECB Report Examines Window-Dressing Behavior in G-SIB Framework

    July 29, 2019

    ECB published a paper that investigates whether window dressing behavior affects additional capital requirements imposed on global systemically important banks (G-SIBs) according to the post-crisis financial regulatory framework. The G-SIB assessment is conducted once a year, with the calculation of G-SIB scores relying on year-end data. Thus, banks involved in the exercise could have an incentive to reduce activities affecting the G-SIB score in the last quarter of the year, with the intention to reduce additional capital buffer requirements arising from the G-SIB framework.

    The paper describes the data used and the current institutional setup to calculate the G-SIB risk score; introduces the methodology to investigate whether banks have been incentivized to window-dress, and the potential role played by capital market activities. The findings of the paper suggest that banks participating in the G-SIB exercise are more likely to reduce activities affecting the additional buffer requirements for G-SIBs at the end of the year, relative to the other banks in the sample. Furthermore, the effects are stronger for banks that are relatively close to a threshold between two buckets associated with different additional buffer requirements (which may have stronger incentives to window dress) and for banks with a larger amount of repo market activities that can be terminated relatively easily at reporting dates. The former result supports the view that it is indeed the G-SIB framework that is incentivizing the reduction in activities affecting the G-SIB score at year-end, rather than other factors such as contributions to the Single Resolution Fund or bank levies in a number of countries that are also based on year-end balance sheet data.

    Overall, the study illustrates that G-SIB scores tended to decline over the sample period, in line with intention of the G-SIB framework to reduce the systemic footprint of banks. However, the regulatory context might have incentivized some banks to window-dress. This may imply a distortion in the relative ranking of the systemic importance of banks and may have adverse effects on the functioning of capital markets and on the provision of financial services, as banks reduce certain activities toward the end of the year. Against this background, further investigation could be warranted to understand whether an alternative metric for the risk score calculation might help to avoid the unintended consequences of the G-SIB framework while guaranteeing a smooth decreasing trend in the systemic importance of banks. Such alternative metrics are already being explored for the leverage ratio framework and could be extended further throughout the regulatory framework.


    Related Link: Working Paper (PDF)

     

    Keywords: International, Europe, Banking, Window Dressing Behavior, Systemic Risk, Single Resolution Fund, G-SIBs, G-SIB Framework, ECB

    Featured Experts
    Related Articles
    News

    ECB Amends Guideline on Temporary Collateral Easing Measures

    ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.

    June 17, 2021 WebPage Regulatory News
    News

    EIOPA Releases Report on Artificial Intelligence Governance Principles

    EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.

    June 17, 2021 WebPage Regulatory News
    News

    HKMA to Increase Focus on Suptech and Regtech Cloud Adoption

    HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.

    June 17, 2021 WebPage Regulatory News
    News

    EC Consults on Improving Transparency in Secondary Markets for NPLs

    EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).

    June 16, 2021 WebPage Regulatory News
    News

    BIS and Nordic Central Banks Launch Innovation Hub in Stockholm

    BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.

    June 16, 2021 WebPage Regulatory News
    News

    FDIC Tech Sprint Aims to Explore Technologies to Reach Unbanked

    FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.

    June 16, 2021 WebPage Regulatory News
    News

    EC Releases Sustainable Finance Taxonomy Compass

    EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.

    June 16, 2021 WebPage Regulatory News
    News

    FDIC Proposes Amendments to Real Estate Lending Standards

    FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.

    June 15, 2021 WebPage Regulatory News
    News

    EIOPA to Consider Liquidity Risk in Stress Test for 2021

    EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.

    June 15, 2021 WebPage Regulatory News
    News

    ESRB Paper Discusses Measurement of Impact of Bank Failure via Lending

    The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.

    June 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7116