The capital buffer calibration for other systemically important institutions‐Is the country heterogeneity in the EU caused by regulatory capture?
| Published date | 01 November 2022 |
| Author | Michael Sigmund |
| Date | 01 November 2022 |
| DOI | http://doi.org/10.1111/sjpe.12308 |
Scott J Polit Econ . 2022;69:533–563. wileyonlinelibrary.com/journal/sjpe
|
533
© 2021 Scottish Ec onomic Society.
Received: 31 Janu ary 2021
|
Accepted: 15 Decem ber 2021
DOI: 10.1111/sjpe.12308
ORIGINAL ARTICLE
The capital buffer calibration for other
systemically important institutions- Is the country
heterogeneity in the EU caused by regulatory
capture?
Michael Sigmund
Oesterreichische Nationalbank (OeNB),
Vienna, Aus tria
Correspondence
Michael Sigmund, Oesterreichische
Nationalba nk (OeNB), Otto- Wagner- Platz 3,
A- 1090 Vienna , Austria.
Email: michael.sigmund@oenb.at
Abstract
In this article, we d iscuss how the too- big- to- fail dilemma
for large financial institution is addr essed in the regul atory
framework and how (differently) regulators in the EU apply it.
The European Banking Authority (EBA) has devised a b uffer
guideline for identif ying other systemically importa nt institu-
tions (OSIIs) to address t his issue. This guideline define s how
to iden tify OSIIs by a scoring process but does not specif y
how to map these scores into ad ditional capit al buffers. In
this st udy, we empiricall y show that the OSII buffer assign-
ment is very hete rogeneous in Europe. First , based on all EU
banks that were classified a s OSIIs, we show that the OSII
score has less impact on the OSII buffer than the headquarter
country du mmy. Second, if all cou ntries applied the German
OSII buffer assignment, the additional capital requirements in
the e uro are a would in creas e by 90 bn EUR. Thi rd, we ana lyze
whether our results could be explained by regulator y capture
which is measured by supervisory quality, supervisory fund-
ing, importance/concentratio n of the banking system, and
political or ientation of the government . We find among oth-
ers that supervisory quality and supervisor y funding without
banks' participat ion increase OSII buffers significantl y.
KEYWORDS
systemic risk , financial stabilit y, macroprudential polic y, other
systemically important institutions, regulatory capture
534
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SIGMUN D
1 | INTRODUCTION: SYSTEMIC RISK AND FINANCIAL REGULATION
The 20 07– 2008 financial crisis has shown t hat identifyi ng systemica lly import ant financial institutions is a key
topic in financial regulat ion. The depth and severity of the financial crisis were cle arly amplified by the assumption
that cert ain financial ins titutions were to o big to fail. A t least many mar ket participants made incorrect assump-
tions abo ut an institut ion being too big to fail. The Lehman B rothers serve as such an example, since it was not
saved. The shock waves through the financial system were measurable through stock market and CDS data from
other fi nancial institu tions (Dumontau x & Pop, 2 013) and from non- financial corporates (Chakrabarty & Zhang,
2012). On the interbank market, Ivashin a and Schar fstein (2010) show that there was a run by shor t- term bank
creditors, ma king it difficult for ban ks to roll over their short- te rm debt in the United States .
These paper s provide empirical e vidence that idiosyn cratic shocks can ea sily spread through th e entire finan-
cial system . In the context of interconnected f inancial institutio ns (Iori et al., 20 06) refer to this r isk as “systemic
risk.” Mos t prominently, the Lehman Brothers was very interconnected to other financial i nstitutions. To make
matters worse, markets and policymakers most probably did not correctly anticipate the systemic risk or its con-
sequences ari sing from the Lehman Broth ers' default.
Especially since the 2007– 2008 financial crisis, most policymakers and regulators agree that systemic risk poses
a significant risk to financial stability. In ECB (2009), financial stability is defined as “a condition in which the financial
system— comprising of financial intermediaries, markets and market infrastructures— is capable of withstanding shocks and
the unraveling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation pro-
cess which are severe enough to significantly impair the allocation of savings to profitable investment opportunities.”
There are two relatively new approa ches to quantify systemic risk. First, t he academic approach is shaped by
the cont ribution of Acharya et al. (2017) , which is developed into SRisk (Brown lees & Engl e, 2016; En gle et al.,
2014), a nd of Adrian an d Brunnerm eier (2016), who introd uce the ΔCoVaR concept. In a nutshell, SRisk quant ifies
the capital sh ortfall of a bank given a stro ng market decline and ΔCoVaR estimates the va lue at risk of the system
as a whole when a par ticular bank faces dis tress, that is, experi ences a tail event.
Second, i n the regulator y approach, simpler concept s are applied to identify globally syst emically impor tant
institutions (GSIIs) and other systemically important institutions (OSIIs)1: Under current Basel III rules, the buf fer
for OSIIs, as well as their current implement ations (EBA, 2014; FED, 2015), aims to address the risk stemming from
the failure of an inst itution. In EBA (20 14), a scoreb oard ap proach is defi ned whe re a number of indicators
weighted by the size of the banking s ystem are added to a n overall score. A high er score should refl ect a greater
risk to the finan cial system if the instit ution fails.
The reaso ns for these two different approaches fo r quantifying systemic risk are quite simp le: The appli ca-
tions of SRisk an d ΔCoVaR require the bank to be publicly liste d. However, acco rding to Si ebenbrunner et al.,
(2017), this is only true for 22% of banks in the United States, 4% in the UK, 3% in France, and as little as 1% in
German y. From a regulator y point of view, SR isk and ΔCoVaR are the refore unfor tunately not applicable to iden-
tify all O SIIs in the EU. On the contrary, the OSII score, as the second best solu tion, can be ca lculated for every
bank and if the OSII s core is above a certain thre shold, then th is bank is clas sified as an OSII (see Sect ion 2 for
mor e detai ls). Ho wever, m ost cri tica lly, the re is no g uidel ine in EB A (2014) ho w to tra nslat e the sco re into a buffe r.
1GSIIs are larg e institution s with an overall e xposure measu re of more than EUR 20 0 billion at the e nd of each year. Every G SII is therefor e also
classified a s an OSII. See BIS ( 2012, 2013) for more de tails.
JEL CLASSIFI CATION
E58; C70; C58
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