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Largest banks still a threat in recession scenario 

June 30, 2016

James West, Financial Post

There are eight banks in the United States that have been designated “GSIB” or “Global Systemically Important Banks” which are subject to annual stress testing by the Financial Standards Board (FSB) among other rigid requirements. Some of the toughest requirements for GSIBs is their Capital Adequacy Requirements.

Under the Basel III accord, GSIBs are required to retain between 11.5 and 13.5 per cent of their assets in highest quality capital. The testing applies what-if scenarios with inputs such as reduced GPD, employment, loan quality, default rates etc., to see how these institutions would fare should they manifest in the real economy.

On top of Basel III’s capital adequacy stipulations, the Dodd Frank Act imposes another layer of compliance onto GSIBs, the FSB is persistently issuing policy statements that incrementally ratchet up the compliance burden. 

“Acting in conjunction with the FDIC, the Federal Reserve Board has also sought to increase GSIB resolvability through its review of the firms’ living wills, according to a speech by Fed vice-chairman Stanley Fischer. Read more

 
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