Measurement Of Systemic Importance

The indicator-based approach
Three criteria of systemic importance: size, interconnectedness and substitutability
• Dominated by size
• In order to develop a more comprehensive approach, moredata regarding interconnectedness and substitutability need to be collected .

Proposals
Option A Use a quantitative measure as a benchmark guide to systemic importance with supervisory discretion toadjust the measure of systemic importance upwards or downwards.

(i) Benchmark guide
• Three indicators in the weighted sum area: (i) total assets (size), (ii) intra-financial system assets(interconnectedness), (iii) intra-financial system liabilities (interconnectedness) presented as a proportion of the global banking system totals
• It is important that the assessment is not purelyordinal in order to create incentives for all banks to reduce their systemic importance.

(ii) Discretionary adjustments
• Due to the lack of data, is important that supervisors take into accountother information (both quantitative and qualitative indicators).

(iii) High level guiding principles
Principle 1: An assessment of a bank’s systemic importance should be guided by the objectives: (i)reduce the probability of a systemically important bank failing; (ii) reduce the extent or impact of the failure of a systemically important bank; (iii) reduce the costs to the public sector should adecision be made to rescue a bank; and (iv) level the playing field by reducing TBTF banks’ competitive advantages in funding markets.
Principle 2: The quantitative measure should be used as abenchmark guide to assess banks’ systemic importance. Supervisors should take into account other information reflecting size, interconnectedness, and substitutability of banks.
Principle 3: Supervisorsshould treat the quantitative guide to systemic importance as a benchmark assessment. Supervisors can increase or decrease the assessment from the benchmark.

Principle 4: Supervisors should use the...