The G-SIBs (global systemically important banks) are required to maintain a higher capital level, called capital surcharge, than other banks. In November 2014, the FSB (Financial Stability Board) updated the list of G-SIBs to include 30 banks. These banks are allocated to different buckets based on the additional capital they’re required to hold.
J.P. Morgan (JPM) is in the bucket with the highest requirements, along with HSBC. It means both these big banks are much more complex than others and require more capital surcharge than the banks in other buckets. You’ll learn about some of the concerns these new requirements have created for J.P. Morgan in the next article.
All of these banks together form ~31% of the Financial Select Sector SPDR ETF (XLF).
The Financial Suitability Board and the Basel Committee
The FSB is a key financial policy research body that monitors the global financial system. The Basel Committee is a committee of banking authorities that provides a forum for cooperation on banking supervisory matters. You can read more about the Basel Committee in Basel banking accord: The accord that shaped and will shape banking.
Both FSB and Basel provide research, recommendations, and advice on the global financial and banking system. These recommendations form the basis of financial and banking regulations in countries worldwide. For more on this topic, read An investor’s guide to the basics of banking regulations.
The FSB issues a list of global systemically important financial institutions, or G-SIFI, and G-SIB. The table above lists the key components of the proposed US G-SIB framework.
A systemically important financial institution is determined based on its size, complexity, interconnectedness, lack of readily available substitutes for the financial infrastructure it provides, and its cross-jurisdictional activity.
These institutions and banks are systemically important. Their failure might set off a series of effects that could ultimately give rise to a crisis situation. This is what happened in the time leading up to the 2008 financial crisis.