JPMorgan Chase & Co. is not the world's largest bank, but it is far and away the most systemically important. As a result, the bank will have to maintain a higher capital ratio than any other lender in the world.
In the latest rankings of global systemically important banks, or G-SIBs, JPMorgan's total score was 467 basis points, making it the only bank in the highest bucket. The Financial Stability Board, an international group of regulators, publishes the systemic risk scores for G-SIBs. Systemic risk scores incorporate five different categories of metrics: size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. A bank's score puts it in a "bucket" that corresponds with a G-SIB surcharge, a buffer that is added to minimum capital ratios established by regulators. The capital buffers can hamper a bank's profitability profile by forcing the bank to keep more capital on its balance sheet.
JPMorgan was not the largest bank in the latest rankings, released Nov. 21, based on year-end 2016 data. That honor went to Industrial & Commercial Bank of China Ltd. with €3.54 trillion, compared to JPMorgan's €3.07 trillion of on- and off-balance sheet items. Only one other bank was over €3 trillion: China Construction Bank Corp., with €3.05 trillion of total exposures. The next two largest banks were Agricultural Bank of China Ltd. and Bank of China Ltd., meaning China-based banks accounted for four of the five largest banks.
However, the Chinese banks tended to have some of the lowest scores for cross-jurisdictional activities — assets and liabilities exposed to countries outside the bank's home country. The Chinese banks also posted relatively small scores for complexity, a measure of derivatives, trading securities and illiquid assets. By contrast, JPMorgan posted the largest complexity score by a wide margin: 654 basis points, over 130 basis points larger than the second-highest score. The scores are expressed in basis points because regulators calculate each category by comparing the bank's total to the aggregate for the world's 75 largest banks. JPMorgan also posted the highest scores for substitutability and interconnectedness.
International regulators publish the rankings of G-SIBs, which correspond with capital buffers. But the scores and buffers do not have to be enforced. Each country's banking regulators choose if and how to implement the international recommendations. U.S. regulators have generally "gold-plated" international regulations, making them more stringent for U.S.-based banks. Therefore, while JPMorgan's score translates to a 2.5% capital buffer per international regulators, the bank expects to face a 3.5% buffer under the U.S. system. The Federal Reserve has adopted an alternative measure of systemic risk that uses wholesale funding dependence as a metric, resulting in higher scores for most U.S. G-SIBs.
JPMorgan stands alone with a 3.5% buffer. The next-highest systemic risk score belongs to another U.S. G-SIB, Citigroup Inc., which expects to face a 3% buffer when the capital surcharge is fully effective in 2019. HSBC Holdings Plc matched Citigroup's systemic risk score as measured by international regulators but does not face the same buffer since it is not subject to the Federal Reserve's "gold-plated" regime. JPMorgan had been looking at a 4.5% surcharge a couple of years ago before taking action to lower its score by reducing its nonoperating deposits, pulling back on notional derivatives and reducing complex, illiquid assets.
While those moves lowered JPMorgan's complexity score, the bank's scores for other categories were higher, most notably its cross-jurisdictional activity number, which was 16.2% higher than its prior-year score. At the same time, lower G-SIB scores do not always translate to the Financial Stability Board's designated buckets.
Regulators have discretion to keep banks in certain buckets regardless of the score. That was the case for two European banks this year. Edinburgh, U.K.-based Royal Bank of Scotland Group Plc reported lower scores for all five categories this year, resulting in a total score of 128 basis points, just a shade under the low end of the first bucket, which was 130 basis points.
At the same time, three banks were able to move down to a lower bucket, translating to a smaller capital buffer: Citigroup with a 20-basis-point drop, BNP Paribas SA with an 18-basis-point decline and Credit Suisse Group AG with a 46-basis-point decrease, by far the largest year-over-year drop.
The largest increases were at China Construction Bank, whose 41-basis-point leap pushed it up a bucket, much larger than the next-biggest increase, a 28-basis-point jump at Sumitomo Mitsui Financial Group Inc.
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