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Analysis: The battle to define G-Sifis

Thursday 10 November 2011 – by Karina Whalley

The Basel Committee on Banking Supervision finally released the names of 29 banks classified as globally systemically important financial institutions on Friday. But some are arguing that the lists are not an effective way of mitigating systemic risk. Global Financial Strategy spoke to industry bodies and think tanks to gauge their reaction to the designated G-Sifis.

The European Banking Federation is warning that many of the banks that triggered the financial crisis in 2007 and 2008 would not have been included in the current list of systemically important financial institutions.

The industry body is particularly concerned about the use of lists in capturing systemic risk in the financial system.

The EBF told Global Financial Strategy: “The EBF has long expressed its concern about the problems associated with the use of lists of Sifis specifically about the ‘borderline’ problems around the cut-off point.”

But Nicolas Véron, a senior fellow at think tank Bruegel, says the list of banks is “no-nonsense”.

“None of the banks are totally unexpected. Bottom line I think it’s a very reasonable list to start off with and will evolve over time,” he said.

Firms including Barclays, HSBC, Goldman Sachs and Bank of America will now be subject to extra capital surcharges, greater supervisory and regulatory requirements and will have to demonstrate they have effective resolution and recovery plans in place.

The Basel Committee has indicated that banks chosen as G-sifis will change over time with the list being updated annually. Banks on the current list will have to have resolution plans put in place by next year but the capital surcharges will only apply to the 2014 revised list of institutions. The final implementation of the extra capital requirements will take place in 2016.

“I would be cautious of looking at the impact in terms of a mechanical effect of surcharges because the surcharges will kick in for a different list,” says Véron.

He is also “pleased” that a few Asian banks were included as being systemically important. Japanese banks, Mitsubishi UFJ FG, Mizuho FG, Sumitomo Mitsui FG as well as the Bank of China are on the list.

“As the start of the process it’s good to signal that Japan and China are not exempt,” adds Véron.

Lawrence Goodman, president of the Centre for Financial Stability, says that more work needs to be done in the area of systemically important institutions.

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