Window Dressing Systemic Importance: Evidence from EU Banks and the G-SIB Framework

35 Pages Posted: 7 Apr 2021

See all articles by Luis Garcia

Luis Garcia

European Banking Authority

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department; University of Basel - Faculty of Business and Economics

Taja Sečnik

European Banking Authority

Date Written: April 6, 2021

Abstract

Building on previous research, we study banks’ balance sheet year-end patterns in the European Union (EU) to assess the impact on supervisory measures of their systemic importance. We find that some global systemically important banks (G-SIBs) in the EU compress their balance sheet at year-end to an extent that it allows them to reduce their systemic importance, thus potentially mitigating the impact of the G-SIB capital surcharges or avoiding G-SIB designation altogether. Since some year-end adjustments are a common feature, we compare G-SIBs’ adjustments to those of other systemically important institutions (O-SIIs) and observe that the compression of the latter banks’ balance sheets is notably smaller. G-SIBs’ balance sheets adjustments reflect several drivers, with the most notable year-end declines observed for intra-financial assets and liabilities as well as banks’ notional amounts of over-the-counter derivatives. Reduction is most pronounced for G-SIBs characterised by comparatively high leverage. This evidence of possible window dressing underscores the importance of supervisory judgement in the assessment of G-SIBs, which is indeed a core component of the identification process. We also suggest greater use of average as opposed to point-in-time data in the quantitative part of the G-SIB identification process.

Keywords: Systemically important bank, systemic risk, regulation, financial stability

JEL Classification: G20, G21, G28

Suggested Citation

Garcia, Luis and Lewrick, Ulf and Sečnik, Taja, Window Dressing Systemic Importance: Evidence from EU Banks and the G-SIB Framework (April 6, 2021). European Banking Authority Research Paper No. 12, Available at SSRN: https://ssrn.com/abstract=3820659 or http://dx.doi.org/10.2139/ssrn.3820659

Luis Garcia (Contact Author)

European Banking Authority ( email )

20 avenue André Prothin CS 30154
One Canada Square, Canary Wharf
92927 Paris, La Défense CEDEX E14 5AA
France

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Taja Sečnik

European Banking Authority ( email )

20 avenue André Prothin CS 30154
One Canada Square, Canary Wharf
92927 Paris, La Défense CEDEX E14 5AA
France

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