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
Previous ArticleECB Issues Legal Acts on Targeted Longer-Term Refinancing Operations
Next ArticleESRB Publishes Annual Report for 2018
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA published the annual report on asset encumbrance of banks in EU.
MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.