BIS Paper Explores Enhanced G-SIB Capital Surcharge Framework
A recently published BIS paper explores an alternative, enhanced implementation of the expected impact framework for global systemically important bank (G-SIB) capital surcharges. As developed by the BCBS, the expected impact framework is the theoretical foundation for calibrating the capital surcharge applied to G-SIBs. The alternative framework has the potential to improve the empirical basis of these surcharges and eliminate uneven incentives for G-SIB growth. The paper concludes with some thoughts about the use of these two capital surcharge functions for monitoring the capital adequacy of G-SIBs.
This paper describes four improvements to the current implementation of the BCBS expected impact framework. In this paper, the authors introduce a theoretically sound and an empirically grounded approach to estimating a probability of default (PD) function and apply density-based cluster analysis to identify the reference bank for each G-SIB indicator. They also recalibrate the systemic loss-given-default (LGD) function that determines G-SIB scores, using both the current system based on supervisory judgment and using an alternative system based on CoVaR, to finally derive a continuous capital surcharge function to determine G-SIB capital surcharges.
The authors find that these empirically-based alternative implementations of the expected impact framework would result in minor declines in G-SIB surcharges in the aggregate, but would result in the removal of some of the smaller G-SIBs from the list of G-SIBs. Adopting the "supervisory" surcharge function, which is calibrated to maintain the general level of capital surcharges based on the current supervisory consensus, would result in changes of less than 30 bps in individual G-SIB scores, and in moderate changes in G-SIB surcharges. Adopting a surcharge function that uses CoVaR as a measure of LGD would result in both more significant increases in capital and more significant declines in G-SIB scores and surcharges. These findings suggest that these functions could be used to monitor current G-SIB surcharges, particularly by highlighting gains from the cap on the substitutability score and from cliff effects.
The approach presented in this paper would strengthen the empirical and theoretical foundation of the G-SIB surcharge framework. Moreover, the continuous surcharge function would reduce banks' incentive to manage their balance sheets to reduce systemic capital surcharges, mitigate cliff effects, allow for the lifting of the cap on the substitutability score and penalize growth in the category for all G-SIBs. In addition, the two capital surcharge functions might be used to monitor G-SIBs' capital adequacy and distortions induced by G-SIB surcharges.
Related Links
Keywords: International, Banking, G-SIBs, Systemic Risk, G-SIB Surcharge, Loss Given Default, Regulatory Capital, Basel, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
BCBS Issues Principles for Operational Resilience and RiskRelated Articles
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
EC Mandates ESAs to Propose Amendments to SFDR Technical Standards
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
EBA Examines Supervisory Practices, Issues Deposits Reporting Template
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
US Agency Publications Address Basel, Reporting, and CECL Developments
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
SEC Extends Comment Period on Climate Risk Disclosures
The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.
APRA Reduces Committed Liquidity Facility, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.
CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks
The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.
PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.
EBA Updates Standards for 2023 Benchmarking of Internal Approaches
The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.
EIOPA Responds to Stakeholder Views on Blockchain in Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.
