Abstract
This short chapter tables the question about the qualification of which financial institutions (FI) are ‘systemically important’ (SIFI). Given the high concentration of transactions engaged in by a limited number of market participants, those entities require additional supervision and often additional capital charges simply for being that omnipresent in the global financial network. Some banks and insurers are domestically important and others are so on a global level. For those that don’t qualify as a bank or insurers, they created the designation non-bank non-insurance company (NBNI SIFI). And so criteria were developed to identify them and treat them accordingly. That is harder than it sounds as size and the nature of the transactions engaged in often says very little about the systemic nature of an institution. And so were the initial 2014 rules already revised in 2016. It will stay an ongoing effort with no guarantee of completeness or ultimate accuracy. But where does it leave shadow banking? Most shadow banking entities are not labeled as a bank or insurance company. But most shadow banking activities occur within larger financial groups designated as banks. And with business models changing constantly and being spread out over a variety of (inter)national entities, qualification and treatment need to be continuously revisited.
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Notes
- 1.
For details on the SIFI framework, see FSB, (2010), Reducing the Moral Hazard Posed by Systemically Important Financial Institutions, FSB Recommendations and Time Lines, Basel, October 20 and FSB, (2013), Progress and Next Steps Towards Ending “Too-Big-To-Fail” (TBTF ), Report of the Financial Stability Board to the G-20, Basel, September 2.
- 2.
The first findings are also reported that document a first analysis of the experience to date with the global systemically important bank (G-SIB) framework, the methodology for assessing the systemic importance of G-SIBs. Several issues are examined. First, it is investigated whether G-SIBs and non-G-SIBs have behaved differently since the implementation of the G-SIB framework and if observed differences in behavior are in accordance with the framework’s aims. Next, the question is asked whether there are regional differences in the behavior of G-SIBs and non-G-SIBs. The analysis reveals that G-SIBs and non-G-SIBs behave differently; however, both groups are heterogeneous, so that the indicator outcomes are often highly influenced by a few banks. Nevertheless, most G-SIBs have reduced their G-SIB scores during the period assessed, changing their balance sheets in ways that are consistent with the G-SIB framework’s aims. In contrast, non-G-SIBs have increased their relative G-SIB scores during the same period. Finally, the regional analysis indicates that trends in banks’ G-SIB indicators, and the indicators that contribute most to the final G-SIB score, are heterogeneous across countries and regions. While G-SIBs from the euro area, Great Britain (GB) and the United States (US) have reduced their systemic importance for most indicators, Chinese and Japanese G-SIBs have shown relatively positive growth rates for all indicators, and particularly high ones for indicators in the substitutability category. See in detail: BCBS, (2019), An Examination of Initial Experience with the Global Systemically Important Bank Framework, BCBS Working Paper Nr. 34, February, via bis.org
- 3.
See BIS, (2013), Global Systemically Important Banks: Updated Assessment Methodology and the Higher Loss Absorbency Requirement, Basel and FSB, (2015), Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions, Proposed High-Level Framework and Specific Methodologies Basel, March 4 (Second consultative Document); FSB, (2015), Thematic Review on Supervisory Frameworks and Approaches for SIBs, Peer Review Report, Basel, May 26.
- 4.
BIS, (2012), Principles for Financial Market Infrastructures, Basel, April 2012.
- 5.
FSB , (2014), Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions Proposed High-Level Framework and Specific Methodologies, Consultative document, p. 2. They are regularly updated and revised; see lately: BCBS, (2018), Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement, July, via bis.org. Some of these reviews are only implemented in the period 2019–2022 and not enacted yet. They were therefore not included in the review yet.
- 6.
FSB, (2014), Ibid. p. 3.
- 7.
FSB, (2014), Ibid. p. 3.
- 8.
FSB, (2014), Ibid. p. 3.
- 9.
FSB, (2014), Ibid. p. 5.
- 10.
FSB, (2014), Ibid. p. 6.
- 11.
According to the FSB Global Shadow Banking Monitoring Report 2013, (i) finance companies, (ii) market intermediaries (broker -dealers) and (iii) investment funds comprise 70–80% of the total financial assets of all NBNI financial entities (as proxied by other financial Intermediaries) in 25 jurisdictions at the end of 2012. For details, see http://www.financialstabilityboard.org/publications/r_131114.pdf. FSB, (2014), p. 7 footnote 9.
- 12.
And given historical examples of financial distress or failures in these three sectors that had an impact on the global financial system.
- 13.
GNE is calculated as the absolute sum of all long and short positions, considering the notional value (delta-adjusted when applicable) for derivatives.
- 14.
FSB, (2014), Ibid. p. 14.
- 15.
FSB, (2014), Ibid. p. 15.
- 16.
FSB, (2014), Ibid. p. 21.
- 17.
FSB, (2014), Ibid. pp. 21–22.
- 18.
FSB, (2014), Ibid. p. 28.
- 19.
FSB, (2014), Ibid. p. 28.
- 20.
One of the problems is the ability to disclose information regarding SMAs, as highlighted in the US Office of Financial Research report on Asset Management and Financial Stability, published in September 2013.
- 21.
IOSCO (2009) Hedge Funds Oversight.
- 22.
FSB, (2014), Ibid. p. 28, footnote 35.
- 23.
FSB, (2014), Ibid. p. 29.
- 24.
FSB, (2014), Ibid. p. 29.
- 25.
Bank depositors, on the other hand, are not in the same position and generally neither benefit from a bank’s profits (that goes to bank shareholders) nor do they bear the primary risk of a bank default (FSB , (2014), p. 29).
- 26.
FSB, (2014), Ibid. p. 30.
- 27.
FSB, (2014), Ibid. p. 31.
- 28.
The risks inherent to highly correlated trading strategies by a group of hedge funds operating in turbulent market conditions have been debated, and some believe proven—see footnote 40, p. 31 (FSB 2014).
- 29.
See in detail FSB, (2014), Ibid. pp. 32–36.
- 30.
FSB, (2014), Ibid. p. 38.
- 31.
FSB, (2014), Ibid. p. 38.
- 32.
FSB , (2015), Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions, Basel, March 4; FSB, (2015), Next Steps on the Assessment Methodologies for Non-Bank Non-Insurer Global Systemically Important Financial Institutions (NBNI G-SIFIs), Basel, July.
- 33.
I spend a few pages, but less than it deserves, on the topic in Chap. 7, Vol. II.
- 34.
See Vol. II, Sect. 7.7.
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Nijs, L. (2020). Identifying Non-bank, Non-insurer Global Systemically Important Financial Institutions. In: The Handbook of Global Shadow Banking, Volume I. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-34743-7_6
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