Treasury Report: Asset Thresholds Insufficient to Identify SIFIs

Size alone is not sufficient to identify systemically important banks, according to a report issued today by the Treasury Department’s Office of Financial Research. The report recommended that all but the largest global systemically important banks — currently eight in the United States — be assessed for systemic risk with a modified version of a multifactor approach used in Europe.

The report found that size is not always an effective proxy for systemic importance, noting that some banks with large asset figures have substantially lower multifactor systemic risk scores than others with relatively smaller asset sizes. “[F]or large banks that are not G-SIBs, asset-size thresholds are too simplistic to assess systemic importance,” it said.

For example, a multifactor approach like that used by the Basel Committee on Banking Supervision to designate G-SIBs might include size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. The report’s findings reflected the American Bankers Association’s long-held view that bank supervision should move away from arbitrary asset thresholds toward a more nuanced and tailored approach to assessing systemic risk.

“Our analysis indicates that a multifactor approach could replace the $50 billion asset-size threshold that some U.S. regulations use to identify U.S. banks that are not G-SIBs, but warrant enhanced regulation,” said Richard Berner, an Obama appointee serving as director of OFR. “Relatively large but less-systemic U.S. institutions might no longer face regulatory costs disproportionate to their importance.”