7.6.3 Systemic importance

Documentgegevens:

mr. drs. R.E. van Lambalgen, datum 01-12-2017

Datum: 01-12-2017
Auteur: mr. drs. R.E. van Lambalgen
JCDI: JCDI:ADS592960:1
Vakgebied(en): Financieel recht / Europees financieel recht
Mededingingsrecht / EU-mededingingsrecht

When is a bank systemically important? In that regard, it might be interesting to take a look at how “systemic importance” is defined in the financial regulation. Systemically important banks have received attention from financial regulators in an effort to address the “too-big-to-fail problem”. In economic terms, the “too-big-to-fail problem” constitutes a negative externality. As explained in section 3.2, the fall of a bank may have dramatic repercussions on the stability of the financial system. Systemically important banks represent a higher risk for the financial system. Accordingly, to compensate for this higher risk, these banks should comply with higher own funds requirements.

In that context, the Financial Stability Board (FSB) published a policy framework concerning ‘systemically important financial institutions’ (SIFI’s).1 SIFI’s are defined as “financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity”. As part of the effort by the FSB effort to address the “too-big-to-fail problem”, the Basel Committee on Banking Supervision (BCBS) developed a methodology to identify G-SIFI’s.2 The measurement approach is based on five indicators: i) size, ii) interconnectedness, iii) substitutes or financial institution infrastructure, iv) cross-jurisdictional activity, and v) complexity. These indicators are also enumerated in Article 131(2) CRD IV, which employs the term ‘global systemically important institutions’ (G-SII’s).

The identification of systemically important banks in the financial regulation serves a specific purpose: in order to reduce the probability of failure of systemically important banks, these banks have to comply with higher loss- absorbency requirements. The identification of systemically important banks in State aid control serves a different purpose: it is aimed at establishing whether the aid is appropriate to remedy a serious disturbance in the economy. Because the concept of “systemic importance” serves a different purpose in State aid control, the Commission is not bound by any definition of “systemic importance” given in the financial regulation.

How is “systemic importance” defined by the Commission? The following recital is illustrative of the Commission’s approach towards the notion of “systemic importance”.

“Given the systemic importance of BCP – being one of the leading banks in Portugal – and the significance of its lending activities for the Portuguese economy, the Commission accepts that its failure to satisfy strengthened capital requirements would have entailed serious consequences for the Portuguese economy”.3

This recital illustrates that the Commission takes into account the systemic importance of the beneficiary bank. It also illustrates that the systemic importance is almost taken as a given: it is only substantiated by the fact that BCP is one of the leading banks in Portugal. In the decision on RBS, the Com-mission gave a more detailed explanation of the systemic importance of the bank:

“Given the global nature of RBS’s banking activities, given that RBS is one of the leading ‘high street’ banks in the UK especially in the retail, SME and corporate segments, given the significance of its lending activities for the UK economy, and given its intense financial relationships with other banks, the Commission accepts that RBS is a systemically relevant bank. The Commission, therefore, concludes that the collapse of RBS would entail a serious disturbance for the UK financial sector and thus the UK economy. The aid must therefore be assessed under Article 107(3)(b) TFEU”.4

The recitals that are cited above might create the impression that only large banks are systemically relevant. This impression is not correct, for the Commission has consistently held that even small banks may have systemic relevance. Amagerbanken, Eik Bank, Fionia Bank, Kaupthing Bank Luxembourg, LCCU, Banif, Banco Privado Portugues and Carnegie Bank were all characterised as small banks. Notwithstanding their small size, these banks were considered to be systemically important (in the sense that their bankruptcy would undermine trust in the financial system).5

With respect to these small banks, the Commission used the same reasoning to substantiate their systemic relevance.6 The following recital from the decision on Amagerbanken can serve as an illustration of the Commission’s reasoning:

“The financial crisis has created exceptional circumstances in which the bankruptcy of one bank may undermine trust in the financial system at large, both at national and international level. That may be the case even for a bank of small size, such as Amagerbanken, and particularly so in the case of a relatively small economy such as Denmark where counterparts may tend not to distinguish between individual banks, thus extending the lack of confidence generated by the failure of one bank to the whole sector. Given the great uncertainty due to the financial crisis and the necessity of external funding for the Danish banking sector, as previously stated in the Commission decision of 28 June 2010 extending the Danish guarantee scheme, a lack of confidence in the Danish financial system could severely affect the whole Danish economy”.7

It is noteworthy about this recital that the Commission mentions the financial crisis. This illustrates that the two elements that were identified in section 7.6.2 (i.e. the financial crisis and the systemic importance) are interrelated. The approach of the Commission actually amounts to the following: in a financial crisis, almost every bank has systemic relevance (in the sense that its failure would create a serious disturbance in the economy).8

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FSB, Policy Measures to Address Systemically Important Financial Institutions, 4 November 2011.

BCBS, Global systemically important banks: assessment methodology and the additional loss absorbency requirement, November 2011. The assessment methodology was updated in July 2013: BCBS, Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement, July 2013.

Banco Comercial Portugues (BCP), 30 August 2013, para. 77. A similar consideration can be found in BFA, SA.34820, 27 June 2012, para. 49.

Royal Bank of Scotland (RBS), N422/2009, 14 December 2009, para. 129.

See: Fionia Bank, N560/2009, 25 October 2010, para. 68. Amagerbanken, SA.32634, 6 June 2011, para. 48.

Only in the case of the Portuguese bank Banif, the Commission used a different reason. The Commission noted that Banif had a high market share on Madeira and the Azores. The Commission therefore concluded that “even though the bank is de facto only a small-sized financial undertaking, its local presence gives it some systemic importance.” Banif, SA.34662, 21 January 2013, para. 54.

Amagerbanken, SA.32634, 6 June 2011, para. 48. This recital is reiterated in Amagerbanken, SA.33485, 25 January 2012, para. 98.

In the literature, this view is supported by, inter alia: Psaroudakis (2012, p. 210). Avgoules et al. (2013, p. 212) argue that “the failure of a bank in normal times may well be possible without systemic ramifications (for example, Barings in 1995), while the failure of the same bank in times of stress may generate large systemic effects.”