Global Systematically Important Banks: How They Work

One group of powerful institutions, called global systemically important banks (G-SIBs), is so vital to the global economy that regulators fear their failure could trigger a systemic financial crisis. Identified by their size, complexity, and economic connections, G-SIBs are closely watched by regulators. They must adhere to more stringent standards than smaller banks, including the ability to take on a great flood of losses and still last past any financial storms.

Below, we take you through which banks count as G-SIBs, how they work, and the efforts of regulators to keep them stable in a fast-paced financial environment.

What Are Global Systemically Important Banks?

G-SIBs are a group of financial institutions with such significant economic weight that their failure could trigger global financial instability. The Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) identify these banks based on their size, cross-jurisdictional activities, complexity, and interconnectedness. Different regulatory measures are in place to mitigate systemic risk for G-SIBs.

SIFIs vs. G-SIBs

Regulators often speak of two types of institutions that are “too big to fail”: systemically important financial institutions (SIFIs) and G-SIBs, which are related but distinct terms. In sum, while all G-SIBs are SIFIs, not all SIFIs are G-SIBs. We outline the differences in this table:

Identifying Global Systemically Important Banks 

The FSB and the BCBS assess five criteria to identify G-SIBs: size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity.

• Size: This is considered crucial since larger institutions have a greater potential to cause systemic disruptions if they fail.
• Interconnectedness: This criterion measures the extent to which a bank is linked to other institutions within the financial system, which means it has a greater potential for contagion effects.
• Complexity: This measures the range and intricacy of the bank’s financial instruments, which can complicate how failures are resolved.
• Substitutability/financial infrastructure: If a bank plays a significant role in a particular market or provides essential infrastructure, such as payment systems, its failure can cause substantial disruptions and liquidity issues. Customers of the failed bank may also face higher costs when seeking similar services elsewhere. Four metrics are used to measure this: assets under custody, payments activity, underwritten transactions in debt and equity markets, and trading volume.
• Cross-jurisdictional activity: This measures the global reach of the bank’s operations, reflecting the potential for cross-border transmission of financial shocks to different markets.

Each bank receives a score, and those surpassing a predetermined threshold are classified as G-SIBs. This classification determines the higher loss absorbency requirements and additional regulations that these banks must adhere to, as outlined in Basel III.

For example, though JPMorgan Chase & Co. (JPM) had about a third less in assets in 2023 than the central Chinese banks, it was ranked the highest in terms of the percentage of its capital it needed to hold back as a G-SIB. This is because other factors show Chase to be more central in different ways to major financial institutions and the economy.

For an example of how the G-SIB scores come together, below is a chart of three G-SIBs from 2022 data in each of the five criteria, along with their overall scores. In parentheses is the additional percentage of capital buffers that they must have on hand.

G-SIB Scores for JPMorgan Chase & Co., Bank of America, and Agriculture Bank of China

G-SIB Regulations

Introduced in the wake of the 2008 financial crisis, Basel III aims to strengthen the resilience of the global banking system. It imposes more stringent capital and liquidity requirements on banks, with G-SIBs subject to even higher standards.

G-SIBs must maintain larger capital buffers than those required for other banks with about $100 billion or more in assets. They must also meet the TLAC standard, which ensures that G-SIBs have enough financial resources to go without taxpayer bailouts in an emergency. These measures, updated annually, aim to enhance the resilience of G-SIBs against economic shocks.

In addition to increased capital requirements, G-SIBs face stricter regulatory oversight and enhanced supervisory expectations. They must adhere to more rigorous liquidity and leverage ratios and undergo regular stress testing to assess their capacity to withstand major economic disruptions.

List of Global Systemically Important Banks

The last available list from the FSB, as of November 2023, includes these G-SIBs that are required to have more than 1.0% in additional capital buffers:

• JPMorgan Chase & Co., 2.5%
• Bank of America (BAC), 2.0%
• Citigroup (C), 2.0%
• HSBC Holdings (HSBC), 2.0%
• Agricultural Bank of China (ACGBY), 1.5%
• Bank of China (BACHY), 1.5%
• Barclays (BCS), 1.5%
• BNP Paribas (BNP), 1.5%
• China Construction Bank (0939.HK), 1.5%
• Deutsche Bank (DB), 1.5%
• Goldman Sachs (GS), 1.5%
• Industrial and Commercial Bank of China (IDCBY), 1.5%
• Mitsubishi UFJ FG (MUFG), 1.5%
• UBS Group (UBS), 1.5%

The Role of G-SIBs in Systemic Risk and Financial Stability

Systemic risk refers to the potential collapse or significant disruption of the entire financial system, rather than just a single entity. The fear is that one bank failure could induce a cascading set of dangers that multiply and could soon engulf a sector or economy.

Mitigating the risk at the biggest banks is far easier than trying to stop the multiplying economic effects once they get started. The collapse of Lehman Brothers in September 2008 is a textbook example of how the failure of a large, interconnected institution can trigger a global financial crisis.

G-SIBs play a critical role in the international financial network. Their size, complexity, and the volume of other institutions that rely on them create a systemic risk. The failure or even pullback from the market of a G-SIB can amplify financial shocks through the system, making their stability crucial for preventing financial crises.

The role of G-SIBs in maintaining financial stability is somewhat paradoxical. While these banks are central to the efficient functioning of the global economy, enabling transactions and providing liquidity, they also pose cluster risks.

Recognizing the importance of G-SIBs, regulatory bodies have put in place stringent capital, leverage, and liquidity requirements. These measures, like the additional capital buffers, aim to enhance the resilience of G-SIBs, ensuring they can withstand financial shocks without resorting to government bailouts that can strain public resources and destabilize the global economy.

Real Example of G-SIB Impact

A pivotal event involving global systemically important banks (G-SIBs) was triggered by the collapse of Lehman Brothers, which filed for bankruptcy on Sept. 15, 2008. At the time, Lehman was the fourth-largest investment bank in the United States, with 25,000 employees worldwide and $639 billion in assets.

The collapse of Lehman is often cited as accelerating the 2008 global financial crisis. That crisis highlighted the risks that G-SIBs pose to global financial stability and underscored the need for regulations to make sure these risks don’t appear in the first place. The lessons from the crisis led to the creation and implementation of more robust regulations, including Basel III.

Future Outlook and Challenges

As the global financial landscape evolves, G-SIBs face several challenges on several fronts. One is the need to adapt to an increasingly complex regulatory environment.

Regulators are focused on enhancing resilience against systemic risks, as seen in the aftermath of banking sector challenges, including the collapse of Silicon Valley Bank in 2023. As regulators work to mitigate systemic risk, G-SIBs must navigate a web of new requirements, such as the Basel III reforms, which include higher capital and liquidity standards and the TLAC standard.

Another challenge for G-SIBs is the increasing adoption of digital technologies, such as blockchain and artificial intelligence, which some argue will disrupt traditional banking models. G-SIBs are investing in technology to remain competitive and meet changing customer expectations while managing the risks associated with these new technologies.

Climate change and the transition to a low-carbon economy also present challenges for G-SIBs. As investors and regulators increasingly focus on environmental, social, and governance factors, G-SIBs must align their strategies with sustainable finance principles. This may involve scaling back financing for carbon-intensive industries and increasing support for green projects and businesses. Mitigating the risks of climate change is but another way to mitigate systemic risk.

The Bottom Line

G-SIBs are pivotal to the global financial system’s stability and have greater regulatory oversight to mitigate systemic risks. The complexity of their operations and interconnectedness with other financial institutions pose challenges. Enhanced capital requirements and risk management practices are in place that regulators hope can avoid future crises.