The Financial Stability Board and Global Systemically Important Banks: Unintended Consequences?

Abstract

We identify, measure and compare the characteristics of Global Systemically Important Banks (G-SIBs) vis-à-vis banks not chosen by the Financial Stability Board (FSB) to be in the 2011 G-SIB group; investors’ responses to banks being classified as a G-SIB and how these responses relate to banks’ characteristics; and changes in banks’ financial performance after being named a G-SIB. The G-SIBs were larger, less profitable, more levered, and riskier. We find that the cumulative effect of the FSB announcements on G-SIBs’ stock prices was predominantly negative. In the year following designation, the G-SIBs shrank, reduced their net interest margins, and increased their leverage, market betas, and co-movement among G-SIB stock returns. The increased correlation across stock returns was associated with a reduction in the diversification benefits of holding a portfolio of G-SIB banks, providing evidence that the vulnerability of a G-SIB portfolio to a negative event rose, consistent with an increase in systemic risk. The data suggest that the FSB is not yet achieving its goals.

Keywords: Systemic risk, Regulation, Banks, Co-movement

JEL Classification: G21, G28