China’s Largest Banks Increase in Systemic Importance

China’s largest banks have grown in systemic importance since regulatory tracking and monitoring started in 2012.

Five of China’s banks are currently categorized as Global Systemically Important Banks (G-SIBs) and, as such, are required to hold an additional layer of Common Equity Tier 1 (CET1) capital as a buffer over and above the 4.5% minimum required under the Basel global capital framework.

The G-SIB designation is distilled from a set of approximately 75 banks from around the world selected by the Basel Committee based upon size and deemed to be systemically important. The methodology is run using a select set of indicator data submitted by each of these banks.

Eighteen of China’s banks are currently part of the global peer group, up from 12 in 2014. Fifteen of these have been part of the global peer group since 2014.

The Basel Committee collects the same set of data from a smaller group of banks with risk profiles that could signal systemic significance in the future. Six Chinese banks are currently part of this additional group of banks, up from 2 in 2016.

Banks change in size, both organically and inorganically, according to the business cycle and for idiosyncratic reasons. Size alone, though, does not necessarily indicate whether a particular bank is systemically important.

The extent to which a bank also 1) is connected to its domestic and to the global financial system through, for example, derivative trades and securities holdings, 2) is a counterparty in the financial market for custody and underwriting contracts, 3) has structural and operational intricacies which could impede timely resolution, and 4) has risks that cross international legal jurisdictions, all determine the bank’s level of systemic importance in terms of the potential impact it could have were the bank to fail.

In this white paper, we walk through the Basel methodology in more detail and spotlight the Chinese banks in terms of output.

About the author

Bryan Feierstein, Senior Vice President GARP Benchmarking Initiative (GBI)®, joined GARP in 2015. He has spent much of his career in banking and insurance as a credit risk manager and several years working in the risk technology space. 

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