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What is a systemic bank?

The Financial Stability Board (FSB) has just published the list of Global Systemically Important Banks (G-SIBs) for 2017.  The number of institutions remains the same, but with three significant changes. Systemic banks have a major impact on the economy, but what makes them different from the rest?

The list of G-SIBs is updated yearly in November, and includes a variable number of banks, divided into five categories based upon 12 indicators, according to the level of systemic risk they pose. Of all these, size is the indicator that has greatest weight in the FSB assessment. One of the principal consequences of being classified as a systemic bank is the additional regulatory requirement that these institutions must meet (in terms of the Common Equity Tier 1 ratio).

As BBVA Research has pointed out, the 2017 list identifies 30 institutions as globally systemic (the same number as last year), although with some significant changes: Royal Bank of Canada has joined the list, while the BPCE group has left it; the Bank of China and China Construction Bank have moved up into a category with greater systemic risk and will be required to have an additional capital cushion of 1.5% CET1 (compared to 1% previously). On the other hand, three institutions will have lower capital surcharges: Citigroup (which goes from 2.5% from 2%), BNP Paribas (from 2% al 1.5%) y Credit Suisse (from 1.5% al 1%).

For a bank to be considered systemic, it must have the potential to destabilize the economy if it were to fail. Being classified as systemic implies that if the bank were to disappear from the market, this would have negative consequences for the economy of its home country (Domestic Systemically Important Banks) or for the global economy (Global Systemically Important Banks). The concept originated with the U.S. bank Lehman Brothers, whose failure was one of the first effects of the financial crisis.

The supervisors (for example, in the case of eurozone banks, the European Central Bank) are the ones charged with deciding which bank is included in or removed from the list. Their decision is based on five quantitative criteria with a threshold (130 pbs) that a bank must surpass in order to be considered systemic: size, complexity, interconnection, substitutability and globality.

The current methodology was implemented in 2013 and is undergoing a revision process. In March of this year, the Basel Committee on Banking Supervision (BCBS) published a consultative document with the intention of revising the framework for evaluating these institutions. The deadline for the consultation expired last June. As BBVA Research explains, the BCBS proposes seven fundamental changes aimed at including new sources of systemic risk that are not well reflected in the current methodology. After carrying out an exhaustive evaluation of the quantitative impact of those changes, the Basel Committee on Banking Supervision is expected to publish the revised version before year-end. The first list of systemic banks based on this new methodology will be published in 2019 with data from 2018. For the banks included in this list, the capital requirements will be totally applicable on January 1, 2021.

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