Globally Systemically Important Banks (G-SIBs) and Systemically Important Financial Institutions (SIFIs)

 

In line with our previous discussion on the counterparties/primary dealers of the Federal Reserve (FED) and the member banks of the FED, we will now show the more international aspect of modern banking and finance. There are some banks that are equal if not even above the banks that some of us had once believed were more government controlled. The FED is a central bank.[1] Central banks and financial institutions are governed by international entities. The bank that sets policy for central banks is the Bank for International Settlements (BIS). Then you have the Financial Stability Board (FSB). We will find the modern landscape of banking and finance are far more important with a dire need of exploration than many may realize. With all of this said let us move forward.

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[1] A national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency. (Online, central bank, n.1, 2021)

 

“Certain large banks are tracked and labelled by several authorities as systemically important financial institutions, depending on the scale and the degree of influence they hold in global and domestic financial markets. Since 2011, the Financial Stability Board has published a list of global systemically important banks (G-SIBs), while individual countries also maintain their own lists of domestic systemically important banks (D-SIBs), also known in Europe as "national SIFIs". In addition, special lists of regional systemically important banks (R-SIBs) also exist.” (Wikipedia, 2020)

 

“At recent Summits, G20 Leaders asked the FSB to develop a policy framework to address the systemic and moral hazard risks associated with systemically important financial institutions (SIFIs).” (Board, 2011)

 

The meeting took place in Seoul in 2010. Something that is of extreme interest is found later within the Financial Stability Board (FSB) document,

“SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances.” (Board, 2011)

 

We would have to properly define what the FSB means/meant by ‘public solvency support,’ and ‘public finances.’

 

Public

the public treated as singular or plural Ordinary people in general; the community. (Online, 2021)

Within the context of discussing solvency support and finances the public is being included. Authorities have had to involve the finances of the public to forestall the failure of such institutions due to the distress or disorderly failure of the SIFIs. If all things were equal, then those who made the mistakes or performed utter wrongfulness would be held accountable instead of including others that were not a part of those mistakes or wrongfulness. 

We will focus upon two categories that the Basel Committee on Banking Supervision (BCBS) of the BIS discusses in their section on Indicator-based measurement approach concerning their methodology for assessing the systemic importance of G-SIBs,

As far as cross-jurisdictional activity category when a bank has cross-jurisdictional assets and liabilities the distress or failure of that bank could have international impacts. “… The greater a bank’s global reach, the more difficult it is to coordinate its resolution and the more widespread the spillover effects from its failure.” (Settlements, 2018, p. 6)

Concerning the size category if a bank possesses large shares of global activity, then that bank's distress or failure could have global implications. “… The larger the bank, the more difficult it is for its activities to be quickly replaced by other banks and therefore the greater the chance that its distress or failure would cause disruption to the financial markets in which it operates. … One indicator is used to measure size: the measure of total exposures used in the Basel III leverage ratio, including exposures arising from insurance subsidiaries.” (Settlements, 2018, p. 6)

 

As we have previously discussed some of the counterparties/primary dealers and even the member banks of the FED we will take time to mention another counterparty/primary dealer JP Morgan Chase. In 1893 there was a stock market panic which led JP Morgan (Morgan) in 1895 to demand a meeting with the then current president Grover Cleveland. (Edwards, 2000) A plan by Morgan was implemented to have the U.S. sell 3.5 million ounces of gold to the British. This was amid job losses as well as the depleting funds of the US Treasury Department due to nervous investors desiring to be paid in gold for their dollars. So, a bailout agreement was made between Morgan and the US Government that paid $60 million into the US Treasury Department. (Daily, 2017) Why is this important? Because JP Morgan is not only a counterparty/primarily dealer of the FED (under the name of J.P. Morgan Securities LLC), but also a G-SIB, and a SIFI. According to the BCBS Morgan is a bank that has a cross-jurisdictional presence and is of a size that could have implications, if it were to become distressed or fail, that would reach globally and obviously cause authorities to utilize ‘public finances’ to shore up losses. So, a bank that at one time brokered a deal to bail out the U.S. government later became a counterparty/primary dealer with the FED. They are also a G-SIB and a SIFI. Until next time ...

 

Photo courtesy of the New York Federal Reserve https://www.newyorkfed.org/markets/primarydealers

Photo courtesy of the FSB https://www.fsb.org/wp-content/uploads/Policy-Measures-to-Address-Systemically-Important-Financial-Institutions.pdf

Photos courtesy of the BIS https://www.bis.org/bcbs/gsib/

References

Board, F. S. (2011, November 11). Policy Measures to Address Systemically Important Financial Institutions. Retrieved April 14, 2021, from Financial Stability Board: https://www.fsb.org/2011/11/r_111104bb/

Daily, H. (2017, April 20). During the Panic of 1893, JP Morgan Used $60 Million in Bonds to Bail Out the United States Government. Retrieved April 19, 2021, from History Daily: https://historydaily.org/panic-of-1893

Edwards, R. (2000). The Morgan Bonds. Retrieved April 19, 2021, from Vassar College: http://projects.vassar.edu/1896/morganbonds.html

Online, O. (2021, March). central bank, n.1. Retrieved April 19, 2021, from Oxford University Press: https://www.lexico.com/en/definition/central_bank

Online, O. (2021, March). public, n.1. Retrieved April 19, 2021, from Oxford University Press: https://www.lexico.com/en/definition/public

Settlements, B. f. (2018, July). Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement. Retrieved April 19, 2021, from Bank for International Settlements: https://www.bis.org/bcbs/publ/d445.htm

Wikipedia. (2020, September 20). List of systemically important banks. Retrieved April 14, 2021, from Wikipedia: https://en.wikipedia.org/w/index.php?title=List_of_systemically_important_banks&oldid=979420123