Who Are The Global Systemically Important Banks And What They Mean

In November 2011 the Financial Stability Board published an integrated set of policy measures to address the systemic and moral hazard risks associated with systemically important financial institutions, where an initial group of Global Systemically Important Banks (GSIBs), was identified. This list is updated annually.

GSIBs are allocated to buckets corresponding to the additional amount of capital they are required to hold in order to assure loss absorbency capacity according to their systemic importance. The higher loss absorbency requirements began to be phased in from 1 January 2016 (with full implementation by 1 January 2019).

Total Loss Absorbing Capacity (TLAC) of these institutions should be met alongside regulatory capital requirements set out in the Basel III framework. GSIBs are also subject to requirements for group-wide resolution planning and regular resolvability, higher supervisory expectations for risk management functions, risk data aggregation capabilities, risk governance and internal controls.

But what institutions are at stake?

Currently the list has 30 institutions distributed by buckets, which mean the required level of additional common equity loss absorbency as a percentage of risk-weighted assets each GSIBs needs to have when compared to institutions that are not classified as GSIBs.

In this universe only one third of the institutions hold total assets below 1 tr USD and common equity tier 1 ratios stand over 10% in all cases but Agricultural Bank of China.

Institution's diversity is big. While on the list there are banks with a clear global business, others, albeit also having global physical presence and a diversified range of products on offer, they rely mostly on their domestic markets to generate earnings - this is the case of Chinese and Japanese banks.

On an asset and liability management perspective we see that most of the institutions have customer deposits well exceeding customer loans. Among those who don't, there is no U.S. bank while riskier businesses from this perspective are all based in the Euro Zone.

Also interesting to see is that the banks most reliant on net interest margin to generate earnings are the Chinese, while U.S. banks rely mostly on fee income for earnings generation. Banks that are classified higher in the bucket scale have a more meaningful weight of net interest margin than fee related business.

Looking into trading earnings, half of the institutions in the pool have trading income weighting less than 10% in their operating income stream. The exceptions are Goldman Sachs and surprisingly Agricultural Bank of China - the later seems a heavy trader despite an apparent business profile more focused on retail banking.

When analyzing exposure to Asia, we see that Santander, Wells Fargo and Unicredit are the less exposed. Excluding Japanese and Chinese banks, which have natural exposure to their home countries, Standard Chartered and HSBC are the most exposed to the region.

Although regulatory requirements, in particular those related to capital and leverage, are much tighter than in the past, institutions in general remain very dependent on lending business, as shown by the weight of net interest margins in earnings generation. Dependence on Asia and Pacific is material (more than 10% of risk weighted assets or share of revenues) for around half of the institutions in this pool. Trading activities are also still relevant as more than half of the institutions in the pool have trading revenues over 10% of revenues coming from fees, net interest margin and trading.

This means that on top of increasing regulatory related costs, most institutions may face challenging years ahead on the back of a deceleration in Asia and zero or negative interest monetary policies.

If lending in Europe is not growing faster because banks continue reluctant to lend, negative rates could act as a stimulus to lend, as long as accompanied by measures that contribute to the steepening of the yield curve, and Mr. Trichet did that in the recent monetary policy meeting. Because banks fund themselves more in the short-term and lend more in the longer term, flat yield curves are a bad business. Even if rates are negative, asset buying strategies by central banks and wording guidance that contribute to steeper yield curves would be positive news.

U.S. institutions, although apparently in a better business position than peers, could be penalized if the FED continues pursuing a tighter monetary policy path but the yield curve doesn't increase it's steepness. Market pressure during the first quarter of 2016 contributed to that, which is counterproductive to monetary policy in this aspect.

On the other hand, European Banks dividend yield is higher than U.S. peers, particularly in the case of HSBC and Barclays that are yielding 13.1% and 8.3% respectively. These numbers could well put into perspective their exposure to Asia and to European low rates.

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