Too big to fail? Ranking the banks that matter most

Some banks are supposedly "too big to fail." The G20-affiliated Financial Stability Board (FSB) publishes a list annually which aims to identify these banks. This year's list puts several American banks at the top.

Lehman Brothers. Bear Stearns. Northern Rock. Even to the financially uninitiated, these names mean something. They were banks that collapsed a decade ago during the global financial crisis of 2007-2008. Their names still echo ominously from the past, such was the damage wrought by their downfall.

Banks and financial institutions of particularly intrinsic importance to the global financial ecosystem are sometimes blithely referred to as "too big to fail".

A more sober term is 'global systemically important banks', or G-SIBs for short. In the aftermath of the financial crisis, at the 2009 G20 summit, an international body called the Financial Stability Board (FSB) was set up, its aim being to monitor the global financial system and make recommendations, when it deemed appropriate,

For the past six years, the Basel-based institution has published a list of 'G-SIBs' — the banks that may well be "too big to fail" and whose well-being is paramount to the overall financial system.

The 2017 list was published on Tuesday and it makes for interesting reading. According to the FSB, the bank whose potential failure would be the most dangerous of all is JPMorgan Chase, the New York City-based multinational that currently ranks as the largest bank in the United States.

Little change at the top

The FSB, in conjunction with the Basel Committee on Banking Supervision and various national authorities, applies various criteria to determine the banks of most systemic importance, namely the ones upon which the entire financial superstructure most depends. 

The criteria includes:

  • Capital buffers — how much reserves banks have to draw upon during times of loss
  • Total loss-absorbing capacity — the extent to which banks can continue to perform critical functions during times of crisis
  • Resolvability — the capacity of a bank to carry out an 'orderly' failure
  • Higher supervisory expectations — levels of governance, particularly in terms of managing against risk

The 30 banks included in the list fall into various categories, or 'buckets' as they are known, with JPMorgan Chase the only bank ranked in the second most critical category (none are in the most critical category). Following in the next category are US banks Bank of America and Citigroup, German bank Deutsche Bank and British bank HSBC.

Read more: How dangerous are China's shadow banks?

The remaining banks fall into the bottom two categories, with all of them deemed by the FSB to be institutions of systemic importance.

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In last year's list, JPMorgan Chase was also at the top, ranked alongside Citigroup. There is only one new bank in the 2017 list, with Royal Bank of Canada replacing French bank Groupe BPCE. Bank of China and China Construction Bank both moved to a higher category with BNP Paribas and Credit Suisse, along with the aforementioned Citigroup, dropping to a lower category.

Financial stability: born in the USA?

The ranking broadly corresponds to the list of the world's largest banks, measured by total assets. Most of the world's 30 largest banks appear in the list.

The list underlines the centrality of the American financial system to global economic order. Eight of the banks are American, the highest representation of any one country. The rest are from China, the UK (four each), Japan, France (three each), Switzerland (two), Canada, Germany, Italy, the Netherlands, Spain and Sweden (one each).

The FSB, which is chaired by Bank of England Governor Mark Carney, was set up as part of a G20 strategy aimed at securing the global financial system and avoiding a repeat of the financial crisis of a decade ago.

The annual G-SIB list can be interpreted in that context, with its structure and criteria based on "an integrated set of policy measures to address the systemic and moral hazard risks associated with systemically important financial institutions," as the FSB itself puts it.

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