Featured Product

    BIS Paper Explores Enhanced G-SIB Capital Surcharge Framework

    March 31, 2021

    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
    Related Articles

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8699