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James R. Barth
Senior Fellow
Banking and Capital Markets and China and Europe and Financial Innovations and Global Economy and Public Policy and Real Estate and U.S. Economy
Dr. James R. Barth is the Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute. His research focuses on financial institutions and capital markets, both domestic and global, with special emphasis on regulatory issues.
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WorldaEUR(TM)s biggest bank now also aEUR~systemically importantaEUR(TM)
By: James R. Barth
November 12, 2013
   
   

The Financial Stability Board (FSB) designated the Industrial and Commercial Bank of China as a globally systemically important bank (G-SIB) Monday. This is the largest publicly traded bank in the world and joins 28 other banks as G-SIBs, as shown in the table below. The FSB began identifying G-SIBs in November 2011 and has updated the list each year thereafter. The list will be next updated in November 2014. The banks so identified as G-SIBs are considered to pose a potential threat to global bank stability and therefore merit closer supervisory scrutiny and higher regulatory capital requirements than other banks.

The table below shows the additional capital requirement as a percentage of risk-weighted assets that the FSB recommends for banks identified as G-SIBs next year. The requirement ranges from a low of 1% to a high of 2.5%.

The 29 G-SIBs are headquartered in 11 countries and account for roughly half of the total bank assets in the world and two-thirds of world GDP. However, the banks are not the 29 largest banks in the world. There are three banks that rank among the 29 largest banks but not identified as G-SIBs, including China Construction Bank, Agricultural Bank of China, and ItalyaEUR(TM)s Intesa Sanpaolo. Also, 53 banks are larger than the smallest G-SIB: U.S.-based State Street. This means that size per se is not a decisive factor used by the FSB. Indeed, size is only one of the five factors. The others are the degree of cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity.

It is also clear from the table that the banks designated as G-SIBs can vary over time, with some banks dropped and others added to the list. Currently, all 29 banks are headquartered in mature countries with the exception of two based in China. The United States has eight banks identified as G-SIBs, and France and the United Kingdom each have four. The remaining 11 are headquartered in Germany, Italy, Japan, Netherlands, Spain, Sweden, and Switzerland.

A final comment: Those advocating breaking up big banks might wish to focus on the G-SIBs, at least initially. Any breakup aEUR" which we donaEUR(TM)t recommend aEUR" should proceed by reducing in a proportional manner the importance of each of the FSBaEUR(TM)s five factors rather than simply reducing or limiting size alone. One problem that arises, however, is that a bank identified as a G-SIB this year may not be so identified next year. And a bank not identified as a G-SIB this year may be on the list next year. In short, those advocating breaking up big banks may start the process too quickly or fail to act quickly enough.

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