The Basel Committee on Banking Supervision’s (BCBS) decision to recognize EU banks’ cross-border exposures in other EU banking union jurisdictions as domestic for the purpose of calculating global systemically important banks’ (G-SIBs) capital buffers will benefit BNP Paribas the most, Fitch Ratings says.
However, the capital benefit for BNP Paribas is likely to be partly offset by the inclusion of insurance subsidiaries in the G-SIB buffer calculation when 2022 G-SIB scores are calculated. The BCBS’s favorable capital approach to intra-banking union exposures highlights the increasing integration of eurozone banking sector supervision.
The BCBS’s recently completed ad hoc review of its G-SIB methodology could lead to lower capital buffer requirements for G-SIBs headquartered in the banking union (comprising the 19 eurozone countries, Bulgaria and Croatia). The review recognized two-thirds of intra-banking union exposures as domestic, which will result in a lower systemicity sub-score for cross-jurisdictional exposures than under the existing methodology.
This sub-score is the only part of the overall systemicity score affected by the change. It has a 20% weighting in the overall score. The G-SIB buffer is not currently a regulatory constraint for eurozone G-SIBs, but a lower buffer requirement gives banks more capital management leeway. G-SIBs are grouped into buckets that determine their capital surcharges, based on overall systemicity scores calculated annually.
Fitch estimates that BNP Paribas could move down by one bucket – to bucket 2 from bucket 3 – due to the BCBS’s change. This would lead to a decrease in its G-SIB buffer to 1.5% of risk-weighted assets from 2%. The BCBS has said that no bank will drop out of the G-SIB list as a result of the change. This means that some of the EU G-SIBs in the bottom bucket are likely to remain there, even with reduced scores. Banks in the bottom bucket which could possibly fall below the minimum threshold include Groupe BPCE, Unicredit and ING Groep.
EU authorities will publish more details on the requirements for the revised calculation in the near future. It is not clear when the new approach will take effect, but it could be from the next G-SIB list update in November 2022 (based on end-2021 data), and translate into revised buffer requirements from 1 January 2024.
The BCBS methodological change represents partial international recognition of the European authorities’ work in building an integrated banking union under a three-pillar roadmap. The first pillar is the Single Supervisory Mechanism, established by the ECB. The second pillar, a common resolution authority, led to the creation of the Single Resolution Board and a single resolution fund backstopped by the European Stability Mechanism. However, completion of the third pillar, a European Deposit Insurance Scheme (EDIS) that would break the nexus between eurozone sovereign risk and banking risk, remains elusive.
The absence of the third pillar is probably why the BCBS chose not to consider 100% of cross-border exposures as domestic for the G-SIB surcharge. Implementation of the EDIS would reduce the vulnerability of national deposit guarantee schemes to local shocks by sharing the risk among the member countries of the banking union. This would help to reinforce the region’s financial stability, reduce its fragmentation, and could open the door for supervisors to consider capital fungibility across the banking union.
For banks in the banking union, a reduction in cross-jurisdictional systemicity sub-scores could give scope to expand payments and capital markets businesses outside their domestic markets without a corresponding increase in G-SIB surcharges. However, Fitch does not expect this to trigger significant cross-border mergers and acquisitions given restrictions on capital and funding fungibility.