Pillar 3+ Monthly: June Edition

In this edition of the Pillar 3+ Monthly Newsletter, we provide an overview of risk-weighted assets for year-end 2024 as disclosed by the 29 largest and most complex banks and spotlight the evolution of market risk under the new Basel 3 FRTB framework for the jurisdictions of Canada, Japan, and China.

GARP Pillar 3+ Data Analytics Platform

The Basel Committee on Banking Supervision introduced Pillar 3 in 2004 as part of the Basel Framework to promote market discipline and enhance transparency by requiring banks to publicly disclose key information related to their capital structure, risk assessment processes, and capital adequacy. Pillar 3 disclosure allows stakeholders to evaluate a bank's risk profile for the benefit of their own risk management objectives, from opening a checking or savings account to regulating entire banking systems.

Why is this important? Financial institutions are dynamic entities that grow, organically and inorganically, both of which have the potential to significantly alter their risk profiles from one quarter to the next. The disclosure requirements for banks under Pillar 3 make more information available to stakeholders, in terms of quantity and frequency, than ever before.

The Pillar 3+ Data Analytics Platform, created by the GARP Benchmarking Initiative (GBI)® and accessible for GARP Individual Members, reduces the burden associated with accessing publicly disclosed information by warehousing that data in electronic form according to a normalized risk taxonomy. Static and customizable dashboards using Tableau further facilitate in-country and cross-border bank peer group comparisons.

Access the Pillar 3+ Data Analytics Platform via the GARP Member portal for additional insights. Not a GARP Individual Member? Consider joining by visiting our website and explore the benefits of becoming part of the GARP membership community.

Quarterly G-SIB RWA Wrap-Up – 2024 Q4

The term G-SIB (also known as Global Systemically Important Bank) was introduced into the financial system nomenclature in 2011 following the global financial crisis of 2007-2008, intended to address the risks associated with the world’s largest and most complex banks.

Twenty-nine banks are currently classified as G-SIBs by the Basel Committee on Banking Supervision and the Financial Stability Board.

The framework’s overarching purpose is to promote global financial stability through a methodology designed to measure a bank’s global footprint according to certain systemic risk parameters, as well as assess whether the level of systemic risk warrants additional capital to be set aside by the bank.

In this sense, the G-SIB methodology is meant to counter the “Too Big to Fail” label and the moral hazard associated with it.

Total RWAs across these 29 banks stood at USD 29TN / EUR 28TN at the end of 2024. In USD terms, total RWAs fell by nearly 3%. The 4.1% increase in the EUR-based total was due to a 7% decline in the value of the Euro vs. the USD during Q4.

CANADA and JAPAN – Regionally and in local currency terms, G-SIBs in Canada and Japan reported the largest quarterly change in RWA, +4.2% and +3.9%, respectively, due primarily to increased credit risk. Credit risk accounts for nearly 80% of total RWAs for the Canadian G-SIBs and nearly 90% for the Japanese G-SIBs. RBC and Toronto-Dominion reported higher credit RWAs measured under IRB. SMFG and Mizuho, as well, reported higher RWAs measured under IRB.

BARCLAYS – Barclays reported a 5.2% increase in total RWAs driven by increases in credit risk and operational risk due to the acquisition of Tesco Bank. Foreign exchange movements due to the appreciation of the USD against Sterling also contributed to the increase in credit RWAs.

REST OF WORLD – G-SIBs in the U.S., China, and the Eurozone reported the smallest quarterly changes in RWA: -0.6%, +0.9%, and +0.9%, respectively.

MARKET RISK – Although market risk accounts for a relatively small proportion of total RWAs, we point out the 12.4% increase in market RWAs for G-SIBs in Japan and the 7.2% increase in market RWAs for G-SIBs in Canada. The Office of the Superintendent of Financial Institutions for Canada (OSFI) and the Financial Services Agency in Japan (JFSA) implemented the Basel III market risk framework, a.k.a., Fundamental Review of the Trading Book (FRTB), in early 2024. G-SIBs in both regions opted to go live under the standardized approach for their entire trading book.

CHINA – While the overall quarterly change in RWAs reported by the G-SIBs in China was small (0.9%), we note here as well the change in market RWAs (-12%) and the noticeable variability amongst the five G-SIBs. In lockstep with the Canadian and Japanese regulators, the National Financial Regulatory Administration (国家金融监督管理总局 - NFRA) implemented FRTB in early 2024. The Chinese G-SIBs, like their counterparts in Canada and Japan, opted to go live under the standardized approach for their entire trading book.

Trading Book Market Risk-Weighted Assets – Transition From Basel 2.5 to FRTB

The RWA piece above spotlights the G-SIBs in Canada, Japan, and China and their impact on market RWAs of adopting FRTB under Basel III.

Here we take a closer look and highlight a few key observations regarding how market RWAs for these banks have fared under the new framework. The JSFA, OSFI, and NFRA each implemented FRTB at the start of 2024. One notable similarity across each of the regions is that none of the G-SIBs adopted the Internal Models Approach (IMA) but, instead, opted for the Standardized Approach (SA).

The high cost and complexity associated with implementing and maintaining IMA has often been cited as one of the primary reasons banks generally have opted for SA.

OBSERVATIONS

Moving to SA has had a similar impact in each region in terms of reduced aggregate RWA variability.

Without more granular data, we are unable to make a definitive connection between the lower aggregate RWA variability we discuss below and the intent of FRTB. We simply note that lower RWA volatility is the intent of FRTB through prescribed sensitivities and risk weights meant to reduce discretion and make outcomes more predictable.

Moving to SA has had a dissimilar impact in terms of both the absolute level of aggregate RWAs and the variability of RWAs among the G-SIBs in each region.

JAPAN

• RWAs in the aggregate have trended 7% lower under FRTB compared to the previous 5 years. MUFG has driven the decrease, (4%), with both Mizuho and Sumitomo trending higher at 26% and 15%, respectively.
• RWA volatility in the aggregate has trended 75% lower. MUFG and Mizuho drive much of the decrease, 75% and 50%, followed by Sumitomo at 8%.
• RWA variability amongst the 3 G-SIBs has trended 60% lower.

CANADA

• RWAs in the aggregate have trended 12% higher under FRTB compared to the previous five years. Individually, RBC has trended 2% higher, while TD has trended 31% higher.
• RWA volatility in the aggregate has trended 70% lower, with both RBC and TD trending lower by more than 50%.
• RWA variability across the 2 G-SIBs has trended 30% lower.

CHINA

• For the purpose of the below analysis, we note that Bank of Communications was classified as a G-SIB effective 2024 and did not disclose detail as regards market RWAs prior to 2024.
• RWAs in the aggregate have trended 96% higher under FRTB compared to the previous five years. ICBC has trended to highest (124%), followed by Bank of China and China Construction Bank (108%), and Agricultural Bank of China (33%).
• RWA volatility in the aggregate has trended 13% lower, though we note a 112% increase for the China Construction Bank and a 30% increase for ICBC, balanced by a 44% decrease for Bank of China.
• RWA variability amongst the 4 G-SIBs has trended 160% higher.

Some of the increases mentioned above can be traced to a couple key changes in the revised framework:

• Interest Rate Risk – better capture of tail risk
• Credit Migration Risk – more sensitivity-based approach

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