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Systemically important banks increase cross-border exposures

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Systemically important banks increase cross-border exposures

The world's largest, most systemically important banks have increased their cross-border exposures, just as some market participants are raising the alarm on rising geopolitical risks.

S&P Global Market Intelligence recently scraped systemic risk data for all 30 global systemically important banks, or G-SIBs, a designation that tends to carry additional regulatory scrutiny and tougher capital requirements. The data show that the G-SIBs grew their systemic risk footprints in 2017, especially in cross-border exposures.

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An international consortium of regulators — the Financial Stability Board — publishes the annual list of G-SIBs, but the implementation of G-SIB regulation, such as the specific capital ratio a bank must maintain, is left to each country's regulatory agency. Regulators place G-SIBs in "buckets" based on their systemic risk score, with higher scores triggering more onerous capital ratio requirements.

The Financial Stability Board has yet to publish this year's list of G-SIBs, but each bank has reported its individual systemic risk data. While it is impossible to calculate each G-SIB's "bucket" without the international data, the individualized bank data offer insights into broad trends across the sector.

For instance, of the 30 G-SIBs, 25 reported an increase in cross-jurisdictional claims and 23 posted a higher figure for cross-jurisdictional liabilities.

"Market participants have discussed a variety of risks about certain countries, yet the banks haven't moved their exposures and, in some cases, they've increased it," said Mayra Rodriguez Valladares, managing principal for MRV Associates, a consulting firm for banks and regulators.

JPMorgan Chase & Co. CEO Jamie Dimon cited the growing risks across the globe during a recent earnings call, highlighting concerns in Italy, the United Kingdom, Turkey, Argentina and Saudi Arabia.

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HSBC Holdings PLC has the most cross-border exposure with claims and liabilities each exceeding €1 trillion, according to the G-SIB data. The bank increased those exposures, too, growing claims by 8% from the previous year and pushing liabilities up 5%. Citigroup Inc., which ranks No. 4 among G-SIBs for cross-border activity, posted notable growth in claims and liabilities with both indicators jumping by 13% year over year.

A more recently updated dataset from the Bank for International Settlements shows that foreign-based credit continued to increase in the first half of 2018 in some countries facing economic crises, such as Italy and Argentina. However that data also signaled some caution around other countries.

Aggregate cross-border bank credit in the second quarter decreased by $130 billion from the first quarter, the largest drop in more than a year. On a year-over-year basis, the figure was still up 2%. Among emerging markets, the second-quarter pullback was most noticeable in Brazil, where cross-border credit declined by $19.5 billion, and India, where the measure dropped by $13.3 billion.

On other indicators in the G-SIB dataset, most banks reported year-over-year increases in assets under custody and total exposures, suggesting that the Basel framework was not punitive to the point of discouraging growth and market share gains. Four China-based banks were in the top five largest banks by total exposures, which includes off-balance sheet items; all four of those banks posted year-over-year asset growth of more than 5%. JPMorgan, the largest bank outside of China, grew its total exposures by just 0.4% from the previous year. Still, JPMorgan was able to extend its dominance in numerous business lines, pushing those indicators significantly higher, such as a 15% jump in assets under custody and 8% gain in underwriting activity.

For banks looking to manage their G-SIB scores, the formula is set to change. In July, international regulators announced a revised methodology in how they will calculate the risk scores. The new framework will include more derivatives in cross-jurisdictional indicators, include assets of bank-owned insurance subsidiaries and introduce a trading volume indicator while reducing the weight of the indicator for underwritten transactions volume.

It is unclear if these changes, which take effect in 2021, will temper the growth of G-SIBs, but that might not even be an intended goal. While the G-SIB buckets are designed to impose consequences on banks for increasing their systemic risk footprints, the international framework cannot be too stringent or else each country's regulatory agency will decline to implement, Rodriguez Valladares said.

"Hopefully, it can have some peer pressure, but they can't be so onerous that people turn around and say, 'Why is this foreign body telling us what to do?'" Rodriguez Valladares said.

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Users can find systemically important financial institutions, or SFIs, in Market Intelligence Office under the "Companies" filter, using Keyfield 249008.