Financial Stability & Systemic Risk

METHODOLOGY UPDATES CSA 2021 Financial Stability & Systemic Risk

OVERVIEW: As part of the methodology development process for the 2021 CSA, we have created new questions and updated existing ones to ensure we are capturing the most material sustainability topics. Please find below the new and updated questions for this criterion in 2021.

The question texts and methodology presented may be subject to change at any time before the end of March 2021. In addition, questions may look different in the Online Assessment Tool in terms of question structure and layout.

Please note that all questions may not be applicable to your industry so please carefully consult the Industries Impacted section.

Introduction

Criterion Rationale For healthy corporations and a healthy economy and society, the stability of the financial system is of utmost importance. Threats to the system's stability by excessively complex firms impose large external costs to shareholders, citizens, and the broader economy. Very complex financial institutions are thus more difficult to manage, externally supervise and analyze and are thus more prone to show diseconomies of scale, conduct issues and lack of transparency. The existence of a "lender of last resort" partly eliminates the economically viable competitive threats of bankruptcy which is essential for efficient resource allocation, artificially lowers the cost of capital and funding, creates an unsustainable competitive advantage and gives rise to moral hazard. Efforts to internalize these costs will hence increase the cost of capital and funding and eliminate unsustainable competitive advantage over time. The criterion aims to measure both the ex-ante level of complexity using the FSB framework as a proxy and the ex-post receipt of state aid which is still outstanding to date.

Reason for Update

The layout was modified to bring clarity and streamline the question flow.

Summary of Changes

1. Updated Question: Global Systematically Important Banks

Updated Question1

Question: Global Systematically Important Banks

INDUSTRIES IMPACTED:

BNK Banks FBN Diversified Financial Services and Capital Markets

QUESTION RATIONALE Banks play a vital role in the flow of money and credit between savers and borrowers. For a working economy and society, the stability and sustainability of the entire financial system is of utmost importance. The burdens faced by taxpayers during the state bailouts of the 2008 financial crisis have driven national and international regulatory initiatives that press for the adoption of stronger capital requirements and loss absorbency, among other measures. Global Systemically Important Banks, as defined and monitored by the Financial Stability Board, are particularly subject to these regulatory initiatives, as the Basel Committee on Banking Supervision seeks to improve the resilience of banks and banking systems by examining those institutions that are active in business areas with high-risk exposure. The reforms go some way in addressing the negative externalities caused by the failure of highly complex financial institutions as a result of their risk-taking activities.

KEY DEFINITIONS

Tier 1 Capital: Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations. Under Basel III, the minimum tier 1 capital ratio is 10.5%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.

Total Exposure - balance sheet exposures; (b) derivative exposures; (c) securities financing transaction (SFT) exposures; and (d) off-balance sheet (OBS) items.

Leverage Ratio: The Basel III leverage ratio is a measurement of a bank's Tier 1 capital compared with its average total consolidated assets (sum of the exposures of all assets and non-balance sheet items) that signifies a bank's financial strength, with this ratio expressed as a percentage. The Basel Leverage Ratio framework aims to prevent banks from having an overreliance on leverage. This ratio is meant to be a supplementary measure to risk-based capital requirements.

1 Updates are included within a red frame

The leverage ratio is utilized by regulators and investors because it shows how well a bank can withstand financial stress and remain solvent. Basel III introduced a minimum "leverage ratio", with banks expected to maintain a ratio in excess of 3%. The leverage ratio applies to all internationally active banks. The phrase "fully phased-in" or similar is used because the Basel III requirements are currently being phased in, and will be completely implemented in 2019.

DATA REQUIREMENTS

In the question table, we ask you to indicate the (Basel III) Tier 1 Capital, (Basel III) Total exposure (on and off balance sheet exposures) and the result of the 2, the (Basel III) Leverage Ratio or SLR for US banks. Please note that all Banks are required to report the leverage ratio, should the other 2 components not be av with late implementation please input NAP, with clear explanation and link to responsible authority.

You can find the updated methodology defining "Global Systematically Important Banks" here: http://www.financialstabilityboard.org/publications/r_121031ac.pdf

REFERENCES References .

QUESTION LAYOUT Requirement: The question requires publicly available information.

Please indicate the components of your Basel III Leverage ratio (fully phased-in Basel III framework) and indicate whether you are considered a "Global Systemically Important Bank (G- SIB)".

Yes, we report on the components of the Basel III Leverage ratio.

References (max. 5 allowed)

Your company's reporting currency:

BIS Leverage Components FY 2019 FY 2020 (Basel III) Tier 1 Capital Monetary Monetary Units Units (Basel III) Total exposure (on and off balance Monetary Monetary sheet exposures) Units Units (Basel III) Leverage Ratio numerical numerical

Are you considered a "Global Systemically Important Bank (G-SIB)" as per definition, methodology and most updated list of the Financial Stability Board (FSB)? Please refer to the information button for more information on the exact definition.

Yes, we are considered a G-SIB by the Financial Stability Board. Please specify in which bucket (1-5) corresponding to the required level of additional loss absorbency you are allocated to? - Level 1 - Level 2 - Level 3 - Level 4 - Level 5

No, we are not considered a G-SIB. Not applicable. Please provide explanations in the comment box below. Not known

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