Too-big-to-fail banks in Asia are likely to see the increase of their global systemic importance scores slowed by a newly introduced risk metric: trading volume of bonds and stocks.
Six of seven Asian global systemically important banks, or G-SIBs, reported lower risk scores in the end of 2021 assessment released Nov. 21, after the new scoring framework found them likely to be less disruptive to global liquidity in the event of distress. One of them even moved to a lower capital surcharge bucket, despite the growing sizes of Asian banks.
The Basel Committee on Banking Supervision included trading volume of bonds and equities for the first time to gauge potential disruptions in the provision of liquidity in the secondary market should a G-SIB fail. The inclusion of this metric will likely slow the increase of the overall systemic score of most Asian G-SIBs, which are from China and Japan, as they have much smaller global trading and asset management operations compared with their U.S. and European counterparts, analysts said.
Trading volume captures the gross market value of all securities purchased and sold on a G-SIB's own account and on behalf of third parties during the reporting year, the committee said. The previous methodology only covered securities underwriting activity, which gauged potential disruptions in liquidity only in the primary market.
Trading volume is part of the substitutability factor that indicates the availability of financial institution infrastructure for the services they provide. G-SIB scores are determined by assessing large globally active banks in five equal-weighting categories: size, interconnectedness, substitutability, complexity, and cross-border activity.
Among 30 G-SIBs in 2021, four are from China and three are from Japan, the same as in the previous year. The total exposures, which include off-balance-sheet items, of Chinese G-SIBs grew by between 16.09% and 22.76% as of the end of 2021 from the prior-year period, while those of Japanese G-SIBs were up by between 1.07% and 3.12% during the same period.
Secondary market liquidity
China Construction Bank Corp. moved to a lower capital surcharge bucket, dropping to bucket 1 from bucket 2, joining Agricultural Bank of China Ltd. and Japan's Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc.
Bank of China Ltd., staying in bucket 2, is the only Asian G-SIB whose overall score rose. Industrial and Commercial Bank of China Ltd. and Mitsubishi UFJ Financial Group Inc. also remain in bucket 2.
G-SIBs in bucket 2 are required to have additional common equity Tier 1 capital that is equivalent to at least 1.5% of the bank's risk-weighted assets. The requirement on lenders in bucket 1 is at least 1.0%. The higher the bucket, the more additional capital surcharge is required to cover their potential systemic risk.
Industrial and Commercial Bank of China, the largest G-SIB from China in terms of assets, traded €1.090 trillion worth of bonds and stocks in 2021, according to the committee. Bank of China reported a trading volume of €595.21 billion that year. Two other Chinese G-SIBs, China Construction Bank and Agricultural Bank of China, disclosed trading volumes of €876.52 billion and €1.036 trillion, respectively.
In Japan, Mizuho Financial reported €22.974 trillion worth of trading volume in 2021, the highest among the eight Asian G-SIBs. Mitsubishi UFJ Financial reported €2.083 trillion, and Sumitomo Mitsui Financial reported €961.03 billion.
By contrast, JPMorgan Chase & Co., which had the highest G-SIB score in the world, traded €40.344 trillion of bonds and stocks in 2021. Bank of America Corp., which rose to capital surcharge bucket 3 from bucket 2 in 2021, reported a trading volume of €35.679 trillion that year.