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
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
