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FSB Issues the 2020 G-SIB List: Are Banks Less Risky Now?

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The Financial Stability Board (“FSB”) has issued the list of the global systemically important banks (G-SIBs) for 2020. While the number of banks on the list remains unchanged at 30, there have been a few changes from last year in relation to the buckets assigned to some of the banks.

Per the new list, JPMorgan Chase & Co. (JPM - Free Report) will no longer be regarded as the most dangerous of the 30 banks. The Wall Street giant has been dropped to bucket 3 from bucket 4, in which, now it requires an extra capital buffer of 2% and not 2.5%.

In the third bucket, it is accompanying banks like Citigroup (C - Free Report) and HSBC Holdings plc (HSBC - Free Report) .

Moreover, Goldman Sachs (GS - Free Report) and Wells Fargo (WFC - Free Report) have been dropped down to bucket 1 from bucket 2. These companies now require an extra capital buffer of 1% and not 1.5%. In fact, bucket 1 is the lowest bucket that has been applied to 19 of the 30 lenders.

While all banks’ positions on the list were either unchanged or moved down, there was one exception. China Construction Bank is the only bank that has moved up the list, from bucket 1 to bucket 2.

Notably, the FSB was established after the 2008 financial crisis to protect markets from another shock. To prepare the 2020 G-SIBs list, the FSB used 2019-end data and an assessment methodology designed by the Basel Committee on Banking Supervision (“BCBS”).

The 30 banks that are mentioned on the list are those with extensive global presence whose failure can rattle the global economy.

These banks are required to meet the board’s total loss-absorbing capacity (“TLAC”) standard, which is a measure of the capital these banks need to hold in order to avoid the need for bailouts along with higher capital buffer, resolvability and increased supervisory expectations.

Conclusion

Although some banks have been dropped a notch lower on the “bucket” list, it does not necessarily mean that the global banking system has become stronger or the financial systems more flexible.

This is because the data that have been used to prepare the current list is from a year ago. Since then, a lot has changed across the globe. Most importantly, the economic slowdown caused by the coronavirus pandemic has resulted in a lot of uncertainty within the financial systems. Like other sectors, it has negatively impacted the banking sector to a great extent. The riskiness of banks has changed to a great extent. Additionally, the prevailing low interest rate environment across the United States and elsewhere has been hurting banks’ financials.

Thus, it is too early to consider banks as safer.

JPMorgan, Goldman Sachs, HSBC and Wells Fargo currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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