Basel Committee Consultative Document: Changes to the G-SIBs – revised assessment framework

The proposed changes are to address behavior by some banks around “window dressing” reporting and disclosure of G-SIB scores.

On March 7, 2024, the Basel Committee on Banking Supervision (Basel Committee) published a Consultative Document setting out proposed amendments to its assessment methodology for global systemically important banks (G-SIBs).

The proposed changes are intended to address “window-dressing” behavior by some banks, in the context of the G-SIB framework where regulatory arbitrage behavior seeks to temporarily reduce banks’ perceived systemic footprint around the reference dates used for the reporting and public disclosure of the G-SIB scores.

The proposed revisions relate to:

  • Reporting data: The current version of the G-SIB assessment methodology is incorporated in chapter SCO40 of the consolidated Basel Framework. Paragraphs SCO40.4 to SCO40.18 of the consolidated Basel Framework set out the indicators used to calculate banks’ G-SIB scores. Under the proposed revisions, the relevant paragraphs of the Basel Framework and reporting instructions will be amended such that the stock data used to calculate the G-SIB indicators are no longer based on financial year-end values but are based on an average of values over the financial year. The Basel Committee sees benefits in using the average of daily values over the financial year for the calculation of the stock data items, rather than financial year-end values, as this would negate any window-dressing incentives.
  • Sample of reporting banks: As per the current G-SIB assessment approach, those identified by the Basel Committee as the 75 largest global banks based on the financial year-end Basel III leverage ratio exposure measure (including exposures arising from insurance subsidiaries), are included in the G-SIB assessment sample and are required to submit to their supervisors the full set of data used in the assessment methodology. Under the proposed revisions however, this will be amended such that the 75 largest global banks are no longer identified based on the year-end amount of the leverage ratio exposure measure, but on the average of this measure over the financial year.
  • Disclosure requirements: The current framework requires that, for each financial year-end, all banks with a leverage ratio exposure measure (including exposures arising from insurance subsidiaries) that exceeded €200 billion ($217 billion) in the previous year-end (using the exchange rate applicable at the financial year-end) should be required by national authorities to make publicly available the 13 indicators used in the G-SIB assessment methodology. However, under the proposed revisions, these requirements will be amended such that the 13 indicators to be disclosed will no longer be based only on year-end values, but on the averaged amounts over the financial year.
  • Scope of banks subject to the new requirements: The Basel Committee is considering the scope of banks that will be subject to the new averaging requirements. It believes a wider application would help ensure consistency across all reported and disclosed data, especially given that the G-SIB assessment relies on a relative methodology. It would also help maintain a level playing field across banks participating in the G-SIB assessment exercise, especially with regard to banks’ ability and incentive to window-dress. The Basel Committee is accordingly seeking feedback on approaches to the scope of application of an averaging requirement.
  • Application of new requirements to a subset of indicators only: The new requirements would apply in principle to all G-SIB indicators. However, the Consultative Document acknowledges the potential challenges for banks to provide high frequency averaged data for certain indicators. As such, the Basel Committee will give due consideration to evidence brought forward for specific data items or indicators for which reporting high frequency averages would be particularly challenging.

Next steps

The Basel Committee invites comments on the Consultative Document by June 7, 2024.

The Basel Committee proposes an implementation date of January 1, 2027, with a transitional period starting on January 1, 2026.  During the transitional period, reporting banks will be required to report both financial year-end values and, on a best-efforts basis, their averaged values as set out in the previous sections. During the transitional period, supervisors will be expected to apply supervisory judgment in cases in which material differences between those values are observed.

Simon Lovegrove is global head of financial services knowledge, innovation and product and is based in London.