Crises often bring to light that important developments have escaped our perception, as a result of which we did not see problems coming and could not intervene effectively. A case in point is the Great Depression in the thirties, when practically no macro-economic information was available. This prompted the design of a system of national accounts, which up to this day still serves as essential input for macro-economic policy.
The recent credit crisis has shown that insight into the strong interconnectedness within the financial system, or: systemic risk, is quite limited. This is partly unavoidable: the financial system has become highly complex, and is characterised by ongoing innovation. But there is also much room for improvement. Most financial activities are dominated by dozens of internationally operating institutions, notably banks (Chart 1). Being highly interconnected, these so-termed Global Systemically Important Banks (G-SIBs) form important systemic linkages within the system. The vulnerabilities inherent in these links did not really become manifest until during the crisis, when it became clear how far the effects of the collapse of the American investment bank Lehman Brothers reached, and what key role an institution like American International Group (AIG) had played. National authorities already collect much information on systemic banks, which was considerably extended during the crisis, e.g. via additional reporting and stress tests. However, there is clearly a need for intensified systemic monitoring of G-SIBs.
At the request of the G20, the Financial Stability Board – a cooperative body consisting of the principal financial authorities including the Netherlands – developed a special reporting regime for G-SIBs. The proposed regime was engineered by an international task force led by Aerdt Houben, director of DNB’s Financial Stability Division. Roughly outlined, the regime collects the following data on all G-SIBs:
- On a weekly or monthly basis: the 50 largest exposures and liabilities per individual counterparty. These counterparties will automatically cover the main bilateral relations between G-SIBs, making this group’s network visible. These linkages will afford insight into the risk of contagion among banks and possible second-round effects after a shock. Moreover, they will enable identification of new G-SIBs, as these will naturally occur frequently among the top-50 counterparties of already familiar G-SIBs. Under the proposed regime, AIG would have been identified at an early stage as one of the world’s most systemically relevant institutions.
- Highly-detailed quarterly breakdowns of exposures and funding sources, by country, sector, type of instrument, currency and maturity. While not relating to individual counterparties, the information thus provided is highly detailed, permitting e.g. to zoom in directly on investments in Greek sovereign debt paper or Irish banks, itemized by maturity and currency. The data template also provides for monitoring of funding profiles, e.g. the dependence on dollar financing by US money market funds. Such analyses reveal the extent of existing systemic risks, as banks are sensitive to the same shocks.
- Data that are not bound by a fixed reporting format and set frequency, but are nonetheless useful in determining systemic risk and intervening effectively. A case in point is a G-SIB’s role in vital financial activities, like payments. Furthermore, they provide insight into a G-SIB's group structure, usually a large collection of legal entities.
In developing its proposal, the FSB taskforce explicitly took the costs and benefits into consideration. The proposed regime allows room for raising the reporting frequency and asking for many more different breakdowns. The decision to make use of such options will need to be weighed against the substantial costs involved for G-SIBs in adjusting their systems. It is moreover important also to invest in flexibility. Part of the reporting requirements are therefore “passive” and only activated if circumstances should call for this. For example, the number of counterparties may be temporarily extended or the reporting frequency stepped up from weekly to daily.
The new reporting framework as such is an important step forward. But the FSB proposals are a breakthrough in other respects as well. To enable a correct interpretation of the information, it is essential that the data of individual G-SIBs be compiled into one dataset. So far, national authorities have always been reluctant to share institution-specific data, confining themselves to exchanging such information with foreign supervisors within the scope of the (micro-)prudential supervision on the institution concerned. The FSB proposes to bring together all data into one central “data hub”, to be located at the Bank for International Settlements (BIS) in Basel. There, the data will be subjected to analyses and, subsequently, shared (to a limited extent) with the national authorities of countries accommodating G-SIBs and with international organisations like the IMF.
The new G-SIB reporting regime will be implemented stepwise. After the consultation, the reporting requirements will be formally adopted and implemented. Implementation cannot be realised without institutional adjustments, since at present many obstacles stand in the way of sharing institution-specific data with foreign authorities. Expectations are that the first parts will be implemented end of 2012, and that the new reporting framework will be operational in its entirety end of 2014. Initially only banks will be required to adjust to this new reporting framework. However, one of the subsequent steps will be to develop a similar reporting framework for non-banking institutions.
The new data make a significant contribution to the realisation of the broader G-SIB framework, concerning which recently also other proposals were brought out for consultation. Several elements of these proposals concern an additional capital margin for systemically relevant institutions and requirements by way recovery and resolution plans permitting more effective crisis management.