Global banking watchdog cracks down on big lenders gaming capital rules

Global banking regulators proposed measures on Thursday to crack down on “unacceptable” attempts by the world’s biggest banks to game rules in a bid to avoid heavier capital requirements. About 30 globally systemic banks (G-SIBs), such as JPMorgan, HSBC, BNP Paribas and Morgan Stanley, must hold more capital than smaller domestic peers, based on a range of factors, which determines which “bucket” they are slotted into, and therefore how much extra capital they must hold. The rules were introduced a decade ago after many lenders were bailed out by taxpayers in the global financial crisis.

“The proposed revisions aim at constraining banks’ ability to lower their G-SIB scores through window-dressing,” the Basel Committee said in a statement. The aim is to stop “regulatory arbitrage behaviour” that seeks to temporarily reduce banks’ perceived systemic footprint around the reference dates used for the reporting and public disclosure of G-SIB scores. “This will be achieved by requiring banks participating in the G-SIB assessment exercise to report and disclose most G-SIB indicators based on an average of values over the reporting year, rather than year-end values.” The proposals are out to public consultation until June 7. “The Committee sees the benefits of a wide application of the revisions to all banks participating in the G-SIB assessment exercise, but it is also seeking feedback on options that would apply those changes to a narrower set of banks to reduce the reporting burden,” the committee said. Basel is proposing a start date of January 2027 for the proposed changes.

Banking regulators from the world’s main financial centres are members of the Basel Committee and commit to applying agreed rules in their national handbooks for lenders. The Bank for International Settlements in Basel, Switzerland, where the Committee is based, said in a 2021 paper that up to 13 banks in the European Union would have faced more intense supervision and higher capital requirements in the absence of window dressing. The committee published a study on Thursday on how implementation of its G-SIB rules have evolved over the past decade, saying it showed that the banks have seen their role shrink across all categories of systemic importance. “G-SIBs appear to have adjusted their balance sheets after the introduction of the framework,” the study said.