CP16/23 – Updating UK Technical Standards on the identification of global systemically important institutions (G-SIIs)

On July 28, 2023, the Bank of England (BoE) released a consultation paper CP16/23 titled „Updating UK Technical Standards on the Identification of Global Systemically Important Institutions (G-SIIs).“ This paper outlines proposed changes by the Prudential Regulation Authority (PRA) to the UK’s methodology for identifying and establishing a capital buffer for Global Systemically Important Institutions (G-SIIs). These proposed updates aim to align the UK’s approach with the changes implemented by the Basel Committee for Banking Supervision (BCBS) in 2022 regarding the assessment of systemic importance for global banks.
Specifically, The BCBS methodology uses equally weighted indicators to assess the systemic importance of global banks based on factors like
– institution size,
– interconnectedness,
– complexity,
– cross-jurisdictional activity, or
– the substitutability / financial institution infrastructure.
Institutions must annually submit data in each of these categories to determine their systemic importance score, which then dictates their required capital buffer so as to prevent any potential harm of the financial market from the failure of a G-SII.
The PRA now proposes some changes to its own assessment methodology to align with those of the BCBS, namely:
(1) The addition of a new indicator – Trading Volume: The PRA proposes to add a new indicator, „trading volume,“ under the „substitutability / financial institution infrastructure“ category. This indicator takes into account the trading activities of banks and their positive impact on market liquidity. Specifically, it acknowledges that trading activities by banks contribute to market liquidity, allowing for price discovery and risk management among financial market participants. Disruptions to trading volume could potentially lead to market dislocations and decreasing asset prices and so impact the balance sheets of many market participants. This proposed indicator aims to capture the risk of disruption to trading activities by capturing the trading volume of institutions.
(2) The update of indicator weights: With the introduction of the new „trading volume“ indicator, the scoring mechanism for the „substitutability / financial institution infrastructure“ category would change from a simple average to a weighted average. The existing indicator for underwriting activity, which captures liquidity in the primary market, would have its weighting reduced by half. The new „trading volume“ indicator would then contribute the other half of the weighting. The overall intention is to maintain the relative importance of the factors assessed within this category while accounting for the additional indicator.
(3) The inclusion of insurance subsidiaries in data consolidation: The PRA suggests incorporating the activities of insurance subsidiaries of banking groups in the assessment. This is aimed at better capturing the loss given default of banking groups and reflecting systemic risks originating from insurance business. This change aims to prevent regulatory arbitrage, where activities might be shifted from banking groups to insurance subsidiaries to avoid certain regulations.
(4) The deletion of transitional provisions: The PRA suggest the removal of transitional provisions that were relevant for the initial implementation of the framework in 2015, but are no longer applicable.