Global Systemically Important Bank (G-SIB) Harvard Case Solution & Analysis

Global Systemically Important Bank (G-SIB) Case Study Solution 

Background of G-SIB

When financial crisis struck in 2007, an unprecedented chaos was created which uprooted several international organisations including Lehman Brothers and century old Lloyds. A circulatory debt spiral was created to do collapse of the mortgage market in the World’s biggest economy; America. This debt spiral was equally backed by lack of funds to bail out the flailing banking organisation.  The after effect of that crisis created ripples across the globe and can still be felt especially when this crisis rebounded in 2012. The circulatory debt cycle threatened to absorb the world once again in 2012, but its impact was limited due to extreme measures were taken by relevant authorities like Basel Committee on Banking System (BCBS), European Union (EU), etc. The measures included generating funds for organisations whose collapse would have highest effects on the economy, belt tightening on several debt-ridden economies, etc. Despite that, the casualty rooster consisted of Lloyds, Lehman Brothers, Greece and Spain. The main point on which BCBS worked initially was to limit the negative impact of falling organisations within the organisation so that they do not affect other associated parties or economies. This then resulted in creating models to bail out organisations which could not be allowed to fail mainly due to their size and area of operations. From this crisis,the idea of protecting global systemically important bank (G-SIB) was born. By increasing the ability of these banks to bear the brunt of financial losses hence implementing the concept of going concern, BCBS planned on worldwide recovery.

On the other hand, where Australia is concerned, it was one of the least impacted areas during the crisis, but nevertheless, it was affected too. When Australia’s ‘Big 4’ banks stayed on their path to dominance during the crisis, the true strength and resilience of Australian banking system were on display. Further when these banks started acquiring other banks that were collapsing. Not only their power status grew, but their share of the market increased from 66% to 76% on residential assets and 75% to 87% of housing loans in aftermath of Financial Crisis of 2007.

Comparison of Bramer and Gischer Report and BCBS

Measurement of systemic risk of G-SIB would be of no value to that region, but on an individual level, it would be of utmost importance. For Australia, calculation of systemic risk would be of great help to domestic systemically important banks (D-SIB) including four of its major banks Commonwealth Bank (CBA), Westpac (WBC), Australia and New-Zealand Bank (ANZ) and National Australia Bank (NAB).

Furthermore, BCBS’s work is based on international level and focused on saving big organisations from failing. Their policies and measures are focused on a global level. On the other hand, Australia has their own body for managing data of banking system namely Australian Prudential regulation Authority (APRA). Australia’s main concern is to reduce systemic of its own banking industry. This means that even if the adopt Basel Committee’s standards, it will have to modify them and bring them to an individual or domestic level. Bramer and Gishcher report deals exactly with that. Where this report is completely acceptable to BCBS’s standard, it also modifies them to suit the needs of Australian banking system.

BCBS’s methodology is based on an indicator-based measurement approach which requires banks to generate data based on indicators highlighted in the standards. These indicators are:

  • Cross-jurisdictional activities: which indicate the organisation’s operations impacting other economies. It is further divided into cross-jurisdictional claims and cross-jurisdictional liabilities.
  • Size: indicates that larger the bank, greater will be its fall in the crisis situation. Even though it is not possible for small banks to overtake them, they will effect more by operating in more areas through branches.
  • Inter-connectedness: is indicative of different parties being involved with the bank. A Higher number of significant amount parties will create ahigher risk for the bank. It can be further measured through intra-financial system assets and liabilities and securities outstanding.
  • Substitutability: indicates the diversity of banking operations. If a bank is involved in only one industry, then its collapse will create a huge impact on that industry. It can be calculated from asset under custody, payments activities and underwritten transaction in debt and equity markets.
  • Complexity: can create risk when complex or unusual transactions are carried out. The risk also increases when complex organisational structure and business models are carried out. It can be measured by the notional amount of OTC derivatives, level 3 assets and trading and are available for sale assets.

Bramer and Gischer Report modifies BCBS standard in two areas. First is the development of a scheme for individual measurement and impact of systemic risk on each bank. Second is that this report is focused on identification of D-SIBs whereas BCBS focuses on recognising G-SIBS.
While the report follows indicator-based management approach, one of the indicators which are cross-jurisdictional activity has been changed to Domestic Sentiments. This has been done because where the standards deal the risk of impact of G-SIBs while carrying out cross-the-border activities, the report is only interested in the restricted impact of D-SIBs within the local economy...............

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