While the cry to end “Too Big to Fail” (TBTF) gets increasingly louder here at home in the USA, it’s easy to overlook the fact that it’s a global problem. Instead of trying to end TBTF, however, the International Financial Stability Board is creating policies to address systemic and moral hazard risks associated with these Globally Systemically Important Banks (G-SIBs).
The name is a little misleading because G-SIBs are actually holding companies that own banks and/or other companies. Each November the list is revisited by the Financial Stability Board which then comes out with a new list comprised of five buckets. The buckets are based on the overall size of the Holding Company and its associated risk profile with 5 being the riskiest.
In an effort to deter banks from growing any larger, each bucket carries a surcharge that gets increasingly burdensome as the G-SIB continues to grow. The lowest tier on the bucket scale (1) requires the G-SIB to have an 8% risk-based capital (common equity) to assets ratio 1% over the 7% already prescribed.
The top tier (Bucket 5) has a 3.5% surcharge and at this time, is empty. The hope being that the surcharge is high enough to keep it that way.
This year there are 29 G-SIBs: 19 of them operate FDIC-Insured banks in the U.S. (They are listed on page 2). The new requirements are not effective yet. They will be phased-in beginning in January 2016 with full implantation by January 2019. Perhaps that’s playing a role in Royal Bank of Scotland’s (Bucket 2) planned sale of RBS Citizens Bank (commonly known as Citizens Bank) by 2016.
As U.S. regulators focus on living wills, stress tests and finding a way to break up Big Banks (basically any bank or holding company with consolidated assets of $50 billion or greater), a disincentive like this may be an effective way to discourage further growth and add an extra cushion of capital in case disaster hits in the meantime.
Look at HSBC, for example, the first G-SIB on the list. Headquartered in London, HSBC operates/owns two U.S. banks. These banks, while FDIC-insured, have affiliates around the world, including North and South America, Europe, the Middle East and Asia. An extra 2Â½% cushion (bucket 4) will help keep things like the storm in the Philippines or wars in the Middle East or recessions in Europe (or here) from compromising the stability of the entire organization. Sounds like a good idea to us.