Stocks, SIFIs, And RHINOs (or QT)

In September 2009, leaders of the G20 nations got together in Pittsburgh. It was the third such summit in close succession following the devastating events of the monetary crisis, ostensibly so that each head of state could share strategies with the others as to how to avoid blame. Solutions weren’t in good supply, obviously.

Populism was a bit different in those days, even the most unwise politician knew that at minimum someone somewhere needed to address TBTF (too big to fail). Banks were simultaneously the cause of the disaster and its biggest beneficiaries (according to many people’s perceptions). While millions upon millions of workers were being laid off all over the planet at the same time the official sector was handing out trillions to the ultimate in reckless behavior.

They decided to appeal to the Financial Stability Board despite the fact this FSB organization performed so poorly it had only months before required rebranding (it was first known as the Financial Stability Forum throughout the grave global instability of the crisis). The FSB was tasked with first designating who might be TBTF and then burdening whichever bank with whatever additional bureaucratic rules to placate the stirred masses.

Like capital ratios, the concept of Global Systemically Important Bank (G-SIB) or Systemically Important Financial Institution (SIFI in other supranational contexts) is smoke and mirrors; a layer of almost random mathematics applied haphazardly to the biggest banks. Buckets are big to these people, as are the arbitrary mathematics that go into creating them.

The FSB focuses on five criteria and then assigns each bank a weighted score.

The methodology gives an equal weight of 20% to each of the five categories of systemic importance, which are: size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure and complexity. With the exception of the size category, the Committee has identified multiple indicators in each of the categories, with each indicator equally weighted within its category. That is, where there are two indicators in a category, each indicator is given a 10% overall weight; where there are three, the indicators are each weighted 6.67% (ie 20/3).

Why is everything equal weighted? Showing their hand a little too much here. Why not more specific thoughts on how each category might idiosyncratically contribute to systemic distress? Surely different characteristics mean different things at different firms (and at different times)? They don’t really want to get too deep on these topics, though, they just want to output some complicated-looking numbers to the public.

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