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

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821