Systematical importance of banks

Andrej Asprovski
University american college skopje |
Systematical importance of banks

A systemically important bank is a financial institution deemed by regulatory authorities to be so large

and interconnected that its failure could have a severe detrimental ripple effect on the global financial
system. Such banks are subject to higher capital buffer requirements and are expected to meet
conditions ensuring their resolvability in the event of failure, according to the Basel Committee on
Banking Supervision (BCBS) . The BCBS has established a G-SIBs (Global Systematically Important Banks)
framework with an assessment methodology designed to determine which banks are deemed
systemically important. The methodology is applied annually based on end-year data and revised every
few years. Banks are also subject to national regulations such as the Negative Binomial Regression
Model (NBRM) in the Republic of Macedonia, which determines the financial institution's capital
requirements and specifies methods to assess banks' solvency. As a result, banks that are assessed to
pose large systemic risks are subject to enhanced regulatory requirements, such as the Global
Systemically Important Bank (GSIB) framework of the Basel Committee and the Enhanced Prudential
Requirements introduced in the US by the Dodd-Frank Act. It is essential for regulators to assess
systematically important banks and implement the necessary measures to ensure their stability and
resilience, as their failure could lead to a significant detrimental effect on the global economy.

The systematic importance of banks is a critical issue that has a direct impact on the macroeconomic
landscape. Systematically important banks are those that have a greater than average risk of failing and
consequently, the potential to lead to a systemic crisis and economic downturn. Since 2018, the Basel
Committee on Banking Supervision has used a revised methodology to identify SIBs, which involve an
assessment of 12 systemic importance indicators distributed across 5 categories such as size,
interconnectedness, cross-jurisdictional activity, complexity, and substitutability. When the failure of a
SIBs occurs, it carries a significant risk of eroding public confidence in the banking sector, leading to a
lack of liquidity in the economy, decreased credit availability, and a decrease in economic activity. In the
United States, federal regulators have the authority to determine which financial institutions are SIBs
and impose additional capital requirements and ongoing stress tests on these institutions in order to
reduce the likelihood of their failure. This is critical in ensuring the stability of the banking system and
the macro economy as a whole. Thus, the issue of systematically important banks and their potential
risks is of paramount importance from a macroeconomic point of view.

Larger and more complex banks are more likely to receive regulatory attention due to the potential
impact their failure could have on the overall financial system. Banks with significant assets, extensive
operations, and global interconnectedness are often considered systemically important. Furthermore,
banks that have extensive linkages with other financial institutions, such as through interbank lending,
derivatives, or counterparty relationships, can pose systemic risks. If one of these interconnected banks
were to fail or experience financial distress, it could have cascading effects on other institutions, leading
to broader financial instability. Additionally, banks that provide critical services or perform key functions
in the financial system may be deemed systemically important. For example, if a bank plays a central

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role in clearing and settling transactions or acts as a lender of last resort, its failure could disrupt the
functioning of the overall financial system. Correspondingly, banks that have a significant impact on the
broader economy, such as those involved in lending to households and businesses, may be considered
systemically important. The failure of these banks could lead to a contraction in credit availability,
hampering economic activity and potentially causing widespread economic distress. Risk is also
something to take into consideration when assessing a systematically important bank as banks with
higher risk profiles, such as those engaged in complex trading activities, off-balance sheet exposures, or
excessive leverage, may attract regulatory scrutiny. Such banks are more likely to experience financial
distress during economic downturns, amplifying systemic risks. A history of previous bailouts may also
subject a bank to higher regulations as regulatory authorities aim to prevent a repeat of past failures
and protect taxpayers from potential future bailouts.

NBRM regulation

According the Macedonian banking law, “"Systemically important bank" shall denote a bank
headquartered in the Republic of Macedonia the malfunction or failure of which could lead to systemic
risk”. The NBRM assesses systematically important banks by weighing certain criteria. Weighted criteria
used to determine the systematic importance of a bank by NBRM are size (25%), substitutability (25%),
interconnectedness (25%) and complexity (25%). According to the calculations using data as of 31
December 2021, six banks have been identified as systemically important, which is one bank less
compared to the previous calculation due to the acquisition of Ohridska Bank AD Skopje by Sparkasse
Bank Macedonia AD Skopje. Halkbank AD Skopje, - Komercijalna Bank AD Skopje, - NLB Bank AD Skopje,
- ProCredit Bank AD Skopje, - Sparkasse Bank AD Skopje, - Stopanska Bank AD Skopje are all considered
systematically important.

The capital buffer for systemically important banks aims to increase the resilience of systemically
important banks to unexpected shocks or loses which may occur during their operation. The additional
capital to be maintained by systemically important banks is not an indicator of higher risk compared to
other banks of the system, but of their importance for the overall banking system. The higher solvency
of systemically important banks and their higher resilience contribute to strengthening the safety and
soundness of the banking system, and the economy in general. According to the regulation, the capital
buffer for systemically important banks may range from 1% to 3.5% of risk-weighted assets.

Ensuring the stability of systemically important banks (SIBs) in Macedonia holds significant importance
due to their role as custodians to pension funds. The potential failure of these banks could give rise to a
pension crisis, jeopardizing the savings of thousands of citizens. Moreover, the limited participation of
individuals in capital or money markets results in a substantial portion of savings being held in bank
deposits. Consequently, the reliance on SIBs for the safeguarding of these deposits amplifies their
significance within the Macedonian financial landscape.

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In conclusion, systematic importance of banks is essential given their role as intermediaries between
many sectors in economies globally; however, this necessitates sufficient regulations aimed protecting
not just shareholders' interests but entire economies' stability as well . In essence , large banks often
pose greater threats than smaller peers due mainly due to interconnectivity issues stemming from cross-
border transactions or complex business models . Therefore , policymakers should always be vigilant
regarding systemic risks that could destabilize the banking sector, especially with regards to
systematically important banks.

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Sources:

(https://www.nbrm.mk/images/Dica/prechinici/OtherDocs/II_re_%20Basel_%20Accord.pdf).

https://www.nbrm.mk/content/Regulativa/
Lista_identifikuvani_sistemski_znacajni_banki_2021_ENG.pdf

https://www.nbrm.mk/zashtitni-sloevi-na-kapitalot-en-ns_article-capital-buffer-for-systemically-
important-banks.nspx

https://www.bis.org/bcbs/gsib/denominators.htm

https://www.bis.org/basel_framework/chapter/SCO/40.htm?inforce=20211109&published=20211109

https://www.bis.org/bcbs/g-sibs/gsibshome.htm

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