BCBS Fed Up with Largest Global Banks Attempts to Obscure Their Importance

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HFA Staff
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Are big banks simply ‘window-dressing’ their year-end balance sheets to better ease their regulatory requirements? The Basel Committee on Banking Supervision [BCBS] may think so as it wants to change how it judges the largest global bank’s systemic importance. What problems is ‘window-dressing’ causing and how does BCBS plan to more accurately reflect a bank’s health? Giles Edwards, Managing Director, S&P Global Ratings explains what changes below.

What’s Happening

  • The BCBS is consulting on changes to how it assesses G-SIBs. 
    • Balance-sheet metrics–the cornerstone of financial analysis and regulatory assessments–determine how global systemically important banks [G-SIBs] are categorized and the additional loss absorbing buffers they are required to hold.
    • The BCBS argues that using year-end data points for some of these metrics encourages banks to window-dress their year-end balance sheets to ease buffer requirements.
    • The committee is therefore seeking industry feedback on possible averaging frequencies for key indicators–month-end, quarter-end, or daily averaging, preferring the latter.
  • Banks are not alone in window-dressing balance sheets at reporting dates to impress or comfort investors. 
    • Nonfinancial corporates may also do this. However, bank balance sheets are more dynamic than those of most corporates.
  • The extent of window-dressing undertaken to improve G-SIB indicators has long been unclear because most banks’ years end on Dec. 31 and markets are seasonal. 
    • However, the BCBS says that it now has evidence to disprove the argument around seasonality and demonstrate that window-dressing can have a material influence on banks’ G-SIB categorization.

Why It Matters

  • In the BCBS’ view, window-dressing causes several problems. 
    • These include the misidentification of G-SIBs; the mismeasurement of systemic importance; and potential liquidity evaporation in some markets when window-dressing banks pull back before a reporting period ends.
  • Reduced window-dressing would mean that period-end balance sheets would more accurately reflect a bank’s health throughout the period. 
    • Still, credit analysts understand that a balance sheet is only ever a moment-in-time financial-health snapshot, and at year-end might be influenced by natural seasonality. Specifically for banks, our views of balance-sheet-based measures–capital, funding, and liquidity–are not overly sensitive to small changes in ratios, so such changes do not sway our opinions of fundamental credit strength.

Looking Ahead

  • The BCBS consultation is open for three months, after which it will reflect on stakeholders’ responses and determine what changes to make. 
    • The BCBS acknowledges some uncertainties in the data that has led to this consultation, and may attract some criticism as a result.
    • Nevertheless, we consider it highly likely that BCBS will introduce some kind of averaging method, as it already has for calculating leverage ratios. The uncertainty is therefore more about the methodology it will choose.
    • The BCBS will also decide whether changes would apply to some or all the banks in the annual G-SIB assessment exercise (a far larger cohort than the 29 currently designated G-SIBs).
    • The changes would only take effect from Jan. 1, 2027 (after the end-2026 G-SIB assessment exercise).

Source: Giles Edwards, Managing Director, S&P Global Ratings

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.