More than half of the world's largest, most complex banks reduced their systemic risk scores in the most recent disclosures.
The Financial Stability Board, an international consortium of bank regulators, released the list of global systemically important banks, or G-SIBs, in November 2019. The list is based on the banks' 2018 year-end data. Comparing the data with the prior-year results shows that 18 of the 30 G-SIBs reduced their systemic risk scores, which are composed of five categories: size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. Each of the five categories carries equal weighting in the final score. Higher scores put G-SIBs in "buckets" that increase their minimum capital ratio requirements. Scores are measured in basis points, which show a bank's footprint relative to the 75 largest banks in the world.
Compared to the previous year's list, Bank of China Ltd. posted the largest increase with a 34-basis-point jump in its overall systemic risk score. The bank's score was 287 basis points, placing the bank comfortably in the second bucket, 43 basis points below the cutoff for the next-highest bucket. In an interim report Bank of China noted that the issuance of undated capital bonds and preference shares had bolstered its capital ratios, putting its common equity Tier 1 capital ratio at 11.21%. This is well above the 5.00% ratio required by its domestic regulator, which incorporates the G-SIB surcharge.
Several management teams have said they are focused on their systemic risk scores as a potential constraint and are working to lower their scores.
Japan's Mitsubishi UFJ Financial Group Inc. posted the second-largest increase with a 20-basis-point jump. That put the bank within 19 basis points of the next-highest bucket. Management disclosed in a Nov. 18, 2019, presentation that the bank is working to lower its risk-weighted assets, which are used to calculate several capital ratios. The bank has sold equity holdings and divested certain strategic investments to lower the figure.
"As part of this initiative, we have been working on the reduction of low-profitability assets, mainly in corporate banking and [global corporate and investment bank] since last fiscal year," said CEO Kanetsugu Mike.
Germany's Deutsche Bank AG saw the biggest drop in its systemic risk score at 68 basis points. The bank reported declines in all five categories. The largest decline was a 117-basis-point drop in its complexity score measuring over-the-counter derivatives, trading securities and "level 3 assets," which are defined as illiquid and difficult to value.
The struggling German lender has undergone a yearslong restructuring that includes a review of its equities sales and trading business. After a decision to exit equities altogether in 2019, the bank's score could decline further in next year's exercise. Management recently said the lower systemic score was a welcome benefit of the restructuring effort.
"We have also received positive feedback from our regulators, not only in words, but also in tangible results like in a lower G-SIB buffer," Chairman and CEO Christian Sewing said during a December 2019 call.
JPMorgan Chase & Co. has the world's highest systemic risk score. Executives have said they are working to restrain the company's score, which dropped by 3 basis points in the latest ranking compared to the previous year.
JPMorgan is not the world's largest bank. It does have the world's highest scores on interconnectedness — a measurement of lending and borrowing to other financial institutions — and complexity — a measurement of how many derivatives and difficult-to-price assets the bank holds. JPMorgan also has the highest possible score on substitutability, which regulators cap at 500 basis points, a distinction it shares with Citigroup Inc., Bank of New York Mellon Corp. and State Street Corp. Substitutability measures payments activity, assets under custody and underwriting activity.
"We fully intend to be in the 3.5% bucket for year-end. There are components of G-SIB that we cannot control, and there are components that we can," CFO Jennifer Piepszak said at conference in December 2019. "And those that we can, we treat like any other scarce resource, and we are managing it carefully to the 3.5% bucket."
At the same time, Piepszak said constraining the bank's systemic risk score will become more difficult as the balance sheet grows, and she expressed hope that the Federal Reserve might refine its calculations. While the Financial Stability Board produces the list of G-SIBs, each country's regulator implements the capital ratios. In the U.S., the Federal Reserve calculates a secondary score that tends to produce higher numbers and higher capital ratio requirements than the global standard.
Wells Fargo & Co. CFO John Shrewsberry also said at a recent investor conference that management was focused on the G-SIB ratio, which is low enough that the bank has room to pursue strategic growth initiatives. However, the bank has to first resolve the asset cap restriction the Federal Reserve implemented in 2018.
"Where we choose to go in those veins will be a product of the strategic review, but there is room ... in a G-SIB scale perspective and with other constraining regulatory measures before we begin to bump into those guardrails," he said.
Click here to view a template showing all components of the systemic risk scores for the 30 G-SIBs.