Credit Suisse as a Global Systemically Important Bank (G-SIB)
Credit Suisse as a Global Systemically Important Bank
What are Global Systemically Important Banks?
Introduction
These banks, having been accessed, are considered to pose a serious risk to the global economy, that they would cause a financial crisis if they were to fail.
During the 2008 global financial crisis, the failure of Global Systemically Important Financial Institutions (G-SIFIs), harmed the global economy. Governments around the world and relevant institutions were tasked with preventing the escalation to individual firms. To reduce the severity and likelihood of the problem caused by global important financial institutions, additional measures were put forth and implemented. In 2011, the Basel Committee for Banking Supervision (BCSC), alongside the Financial Stability Board (FSB) published two papers relating to entities regarded as global systemically important banks. Where an initial list of global systemically important banks was identified, with an update of the list annually.
The Basel Committee set out several policy measures and requirements that were applied to all banks, but especially global systemically important banks.
● High Buffer capital requirements
● Total-Loss Absorbing Capacity requirements
● Resolvability requirements
● High supervisory expectations
Based on the papers published by the Basel Committee for Banking Supervision (BCBS) and the Financial Stability Board (FSB), the two main objectives of the policies are:
● Reduce the probability of the failure of the Global Systemically Important Banks (G-SIBs)
● Reduce the extent or impact of the Global Systemically Important Banks (G-SIBs)
How does the Global Systemically Important Banks (G-SIBs) affect the financial sector
1) Cross-jurisdictional capacity.
The larger a bank’s global footprint is, the more difficult it is to conduct resolution and the more dire its contagion would be, upon failure. Two indicators that can be used to tell a bank’s global footprint and its international impact are:
● Cross-jurisdictional claims
● Cross jurisdictional liabilities
The above indicators/metrics measures a bank’s relevance overseas vis-a-vis other banks operating in said jurisdiction. Cross-jurisdictional activity measures a bank’s global footprint. Cross-border claims and liabilities capture the bank’s activities outside of its home jurisdiction.
2) Size
It’s an indication on a bank’s share of global activity. In case of distress or failure, financial institutions with a large share of global financing activities are more difficult to replace. A bank with a large share of global activity, should it fail, would disrupt the global economy and/or financial markets, and would likely damage the confidence of the finance industry.
3) Interconnectedness
A Global Systemically Important Financial Institutions (G-SIFIs) failure could have spillover effects into other institutions, due to counterparty risk and/or contractual obligations. Interconnectedness shows the interlinkages of financing activities vis-à-vis other financial institutions. It also assesses understanding of the likelihood that distress at one financial institution could materially increase the distress at other institutions (knock-on effects).
4) Substitutability / Financial Institution Infrastructure
The larger a bank’s moat in a specific business line, the more difficult it would be to find a substitute should the bank fail, and the greater the disruption would be to the financial markets in which it operates. In addition, the cost would be high for the failed bank’s customer, if they seek the same service from a competitor. It shows an understanding of the impact and costs to substitute a significant market player in distress.
5) Complexity
Keep it Simple and Stupid (KISS) is an acronym commonly used in finance. But Global Systemically Important Banks (GSIBs) are way past that threshold. The expected costs and time required to resolve a financial institution in distress are expected to be higher for a financial institution with high complexity than one with lower complexity. The more complex a bank is, the greater the cost and time needed to resolve the bank.
Regulations of Global Systemically Important Banks (G-SIB)
Global Systemically Important Banks (G-SIBs) should be subject to greater regulation because all problems of the Global Systemically Important Banks could potentially have cross-border influences on the financial institutions in many countries, and even on the global economy at large.
In addition to the indicator-based methodology used for assessment, supervisory judgment is used. The Basel Committee lays out four principles for supervisory judgment.
- The bar for judgemental adjustment to the scores should be higher.
- More importance should be placed on the impact of the bank failure, rather than the probability of it.
- Opinions on the quality of policy in specific jurisdictions shouldn’t affect the G-SIB identification process.
- Well-documented and verifiable quantitative and qualitative information is needed to make a judgemental assessment.
Credit Suisse as a Global Systemically Important Bank (G-SIB)
Credit Suisse Group AG is a Switzerland bank founded in 1856. It’s the oldest bank in Switzerland (166 years). They are a global investment bank and offer financial services in every major financial hub around the world. Credit Suisse has two main units — a private wealth management business and an investment bank. They are also a primary dealer and Forex counterparty to the FED. As of 2021 Credit Suisse had SFr 1.61 Trillion in Asset Under Management (AUM).
A quick aside; one of my favorite economists of all time, Zoltan Pozsar is the Global Head of Short-Term Interest Rate Strategy at Credit Suisse.
Credit Suisse is one of the nine global “Bulge Bracket banks” that provides service catering to investment banking, private banking, and asset management. *Bulge Bracket banks are the world’s largest multinational investment banks servicing mostly governments, institutional investors, and large corporations.
Since the great financial crisis, banks all around the world have had a bad time. The Global Systemically Important Banks (G-SIB), in Europe, aren’t an exception. Credit Suisse’s assets have ranged from $1T (its peak in 2007) to $750B. Deutsche Bank has had its worst, with its assets falling from $2.7T to $ 1.4 T. This isn’t just peculiar to Credit Suisse (CS) and Deutsche Bank (DB), it’s the theme for most Global Systemically Important Banks (G-SIB).
The size of Credit Suisse has shrunk over the past decade. With its market cap down -87% in the past decade. The same can also the said of Deutsche Bank, whose market cap shrunk by -74%. Since the peak in 2007, both Credit Suisse (CS) and Deutsche Bank (DB) are down -95% and -92% respectively.
Conclusions
In this piece, we’ve accessed what Global Systemically Important Banks (G-SIBs) are, their origins, how they impact the financial markets, and how they can be regulated properly. We also took a look at the degradation witnessed in Global Systemically Important Banks (G-SIBs) in Europe, in the past decade — using Credit Suisse as a case study.
References
https://www.risk.net/definition/global-systemically-important-bank-g-sib
https://www.fsb.org/2022/11/2022-list-of-global-systemically-important-banks-g-sibs/
https://www.bis.org/basel_framework/chapter/SCO/40.htm
