The Frankfurt skyline with its financial district, on Sept. 18, 2018.Kai Pfaffenbach/Reuters
Global banking regulators proposed measures on Thursday to crack down on the world’s biggest banks that game capital requirements by making derivatives positions appear temporarily smaller.
Some 30 globally systemic banks (G-SIBs), including JPMorgan, HSBC, BNP Paribas and Morgan Stanley, are required to hold more capital than smaller domestic peers, based on a set of factors that determines how much extra capital they must hold.
The rules were introduced a decade ago after many lenders were bailed out by taxpayers in the global financial crisis.
A practice known as window-dressing by banks is directly responsible for a year-end reduction in notional over-the-counter derivatives of about €30-trillion ($32.82-trillion), or about 5 per cent of global activity in this market, the Basel Committee on Banking Supervision said.
It explains about half of the year-end reduction in the sector.
“The proposed revisions aim at constraining banks’ ability to lower their G-SIB scores through window-dressing,” the Basel Committee said, adding banks participating in the G-SIB assessment exercise would be required to report on the basis of an average of values over the reporting year, rather than year-end values.
The aim is to stop “regulatory arbitrage behaviour” that seeks to temporarily reduce a bank’s perceived systemic footprint around the reference dates used for the reporting and public disclosure of G-SIB scores.
The proposals are out to public consultation until June 7 and Basel is proposing a start date of January 2027 to implement the planned changes.
“The Committee sees the benefits of a wide application of the revisions to all banks participating in the G-SIB assessment exercise, but it is also seeking feedback on options that would apply those changes to a narrower set of banks to reduce the reporting burden,” the committee said.
Banking regulators from the world’s main financial centres are members of the Basel Committee and commit to applying agreed rules in their national handbooks for lenders.
The Bank for International Settlements in Basel, Switzerland, where the Committee is based, said in a 2021 paper that up to 13 banks in the European Union would have faced more intense supervision and higher capital requirements in the absence of window dressing.
Last December, the European Central Bank said it has applied extra capital requirements to six banks after finding excessive variability around reporting days.
The committee published a study on Thursday on how implementation of its G-SIB rules has evolved over the last decade, saying it showed the banks have seen their role shrink across all categories of systemic importance.