Global systemically important bank

A global systemically important bank (G-SIB) is a bank whose size, complexity, interconnectedness, cross-border activities, or other characteristics are considered capable of creating significant risks to the international financial system if the bank were to experience severe financial distress or fail.

G-SIBs are identified under an international framework developed by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS).

A simplified representation is:

$\text{Bank}\to \text{Systemic Importance}\to \text{G-SIB Designation}\to \text{Additional Prudential Requirements}$

Identification

G-SIBs are identified using an assessment methodology based on indicators of a bank's systemic importance.

The methodology considers factors including:

• size;
• interconnectedness;
• substitutability or financial-institution infrastructure;
• global activity;
• complexity.

A simplified representation is:

$\text{Systemic Importance}=f(\text{Size},\text{Interconnectedness},\text{Global Activity},\text{Complexity},\text{Substitutability})$

The methodology is designed to identify banks whose distress could have significant consequences for the global financial system.

Size

The size of a bank is one factor considered in assessing systemic importance.

Larger institutions can have greater potential to affect financial markets, counterparties, creditors, and other financial institutions.

A simplified relationship is:

$\text{Greater Bank Size}\to \text{Greater Potential Systemic Impact}$

Size alone does not determine whether a bank is classified as a G-SIB.

Interconnectedness

Interconnectedness refers to the extent to which a bank is connected to other financial institutions and markets.

Connections can arise through:

• lending;
• borrowing;
• derivatives;
• securities transactions;
• payment systems;
• funding relationships.

A simplified transmission mechanism is:

$\text{Bank Distress}\to \text{Counterparty Losses}\to \text{Financial Contagion}$

Greater interconnectedness can therefore increase the potential for financial distress at one institution to affect other parts of the financial system.

Substitutability

Substitutability concerns the extent to which other financial institutions or market infrastructures could replace a bank's services if the bank experienced severe disruption.

A bank can have systemic importance if it provides financial services that are difficult to replace quickly.

A simplified relationship is:

$\text{Low Substitutability}\to \text{Greater Potential Systemic Impact}$

Relevant activities can include payment services, custody, market-making, clearing, and other financial infrastructure functions.

Global activity

G-SIB assessment considers a bank's international activities and its importance across jurisdictions.

A bank with substantial cross-border operations may transmit financial stress across national financial systems.

A simplified representation is:

$\text{Cross-Border Financial Activity}\to \text{International Interconnections}\to \text{Potential Global Spillovers}$

Complexity

Complexity reflects the nature and difficulty of resolving a bank's financial activities and organizational structure.

Complexity can arise from:

• derivatives;
• structured financial products;
• complex legal structures;
• trading activities;
• cross-border operations;
• other financial-market activities.

A simplified relationship is:

$\text{Greater Complexity}\to \text{Greater Resolution Difficulty}\to \text{Potential Systemic Risk}$

Additional capital requirements

G-SIB designation can result in additional capital requirements intended to increase the resilience of systemically important banks.

A simplified relationship is:

$\text{G-SIB Designation}\to \text{Higher Loss-Absorbing Capacity}\to \text{Greater Financial Resilience}$

The additional requirements are generally implemented through higher capital buffers and other prudential measures.

Capital surcharge

G-SIBs are assigned to categories or "buckets" according to their assessed systemic importance. Each bucket corresponds to an additional capital surcharge.

A simplified representation is:

$\text{Higher Systemic Importance}\to \text{Higher Capital Surcharge}$

The applicable requirements can change as the methodology and international prudential framework develop.

Resolution and recovery

G-SIBs are subject to enhanced supervisory and resolution planning because their failure could have significant consequences for the financial system.

Resolution planning is intended to enable authorities to manage the failure or severe distress of a systemically important institution while limiting disruption to the broader financial system.

A simplified resolution objective is:

$\text{Bank Distress}\to \text{Resolution Measures}\to \text{Continuity of Critical Functions}\to \text{Reduced Systemic Disruption}$

Systemic risk

G-SIBs are closely associated with Systemic risk because their financial difficulties can potentially affect other institutions and markets.

A simplified transmission mechanism is:

$\text{G-SIB Distress}\to \text{Financial Contagion}\to \text{Broader Financial Stress}$

The designation does not mean that a G-SIB is necessarily unsafe or that its failure would automatically cause a financial crisis.

G-SIBs and the financial system

G-SIBs perform important functions within the global financial system, including lending, payments, securities trading, market-making, asset management, and other financial services.

Their systemic importance reflects both the economic importance of these activities and the potential consequences of their disruption.

A simplified representation is:

$\text{G-SIB}\to \text{Critical Financial Services}\to \text{Financial-System Interdependence}$

See also

• Systemic risk
• Financial Stability Board
• Basel Committee on Banking Supervision
• Global systemically important financial institution
• Systemically important financial institution
• Banking regulation
• Capital requirement
• Bank resolution
• Too big to fail