Monday, November 11, 2013

The Financial Stability Board evidences its utter confusion, again, with their G-SIBs list, a subset of the G-SIFIs.

For those who need some translation the G-SIBs are the banks among the Globally Financial Important Financial Institutions, the G-SIFIs.

And we there now find 29 banks, since recently Bank of China was added to the original 28, perhaps because China objected to not having one single bank among that exclusive group of banks.

But, what does all this mean? There are 5 buckets indicating how much additional capital each bank as a percentage of risk-weighted assets a banks needs to hold, for the regulators feeling reasonably sure, the world is secure. These buckets are 1%, 1.5%, 2%, 2.5% and, the horror, the empty 3.5% bucket.

I mention that last one because although “the bucket thresholds will be set initially such that bucket 5 is empty, if this bucket should become populated in the future, a new bucket will be added to maintain incentives for banks to avoid becoming more systemically important… eg if bucket 5 should become populated, bucket 6 would be created with a minimum higher loss absorbency requirement of 4.5% etc)."

If you think the above to sound as a quite infantile regulations, like scaring the children with the boogeyman, I would probably share your appreciation… because what do you think could happen if suddenly regulators got so scared that empty bucket had to be occupied? Would that not cause a crisis by itself?

But let us see how boogeyman the boogeyman really is. The secret is in the “as a percentage of risk-weighted assets”. If the risk weights are low enough that extra capital banks need to hold does not mean much. 

If a G-SIB holds 1/3 each of 0%, 20% and 50% risk-weighted assets, then the currently most G-SIBs, those in the additional 2.5% capital budget, then it is authorized to leverage over 40 to 1. Is this sane?

Why do they not try with an extra 3 percent on all assets, no matter an asset’s risk-weight. That would really put a cracker in the G-SIBs’ pants. Perhaps Bank of China would scream… “Take me out, I don’t belong here”

No friends let me assure you that if I was a Global Systemic Important Bank, and that the price for being The Most Systemic Important Global Bank in the world, would be to have an additional 1% or risk-weighted assets in equity… I would gladly say… “Sure, bring it on!”

But the saddest part of the story is, sine qua nom, that the more regulators insist on the risk-weighing of assets the less access to bank credit will those who most need it and who we most want to have access to it, namely “The Risky”, like medium and small businesses, entrepreneurs and start-ups.