BCBS proposes action on “window dressing” in G-SIB reporting
07 March 2024 Switzerland
Image: AdobeStock/AdobeStock/doganmesut
The Basel Committee on Banking Supervision (BCBS) has launched industry consultation to address perceived “window dressing” by large banks in reporting to the G-SIB framework.
The Committee has put forward changes designed to limit banks' ability to lower their G-SIB scores through this so-called window dressing, for example by unwinding trading exposures in the lead-up to reporting dates.
It will do so by requiring banks falling into scope of the Global Systemically Important Bank (G-SIB) framework to report and disclose G-SIB indicators based on average values over the reporting year, rather than by using year-end values.
The BCBS argues in the consultation paper that such window-dressing behaviour by banks is unacceptable. “Such behaviour undermines the intended policy objective of the Committee’s standards and risks disrupting the operations of financial markets,” says the BCBS.
It notes that this regulatory arbitrage behaviour seeks to temporarily reduce banks’ perceived systemic footprint over the reference dates employed for reporting and public disclosure of G-SIB scores.
Respondents to the public consultation are asked to file their comments to the BCBS by 7 June 2024.
The Basel Committee has been monitoring perceived dislocations over reporting dates and potential “reporting arbitrage behaviour” for a number of years.
In an October 2018 statement, for example, it flagged up “heightened volatility” in some segments of the money markets and derivatives markets around reference dates — particularly over quarter-end reporting dates — and indicated that this had alerted the Committee to “potential regulatory arbitrage by banks”.
“A particular concern is window dressing, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios,” says the BCBS in this 2018 statement.
At this time, it advised that banks should “desist” from undertaking transactions with “the sole purpose of reporting and disclosing higher leverage ratios at reporting days only”.
It recommended that financial supervisors might also consider requiring more frequent reporting of transaction volumes by in-scope firms, particularly between current reference dates. This should be accompanied by further public disclosures to monitor the impact on bank leverage of transaction volumes between reporting dates.
Recognising the impact that banks’ preparations for year-end reporting can have on transaction activity for several months prior to the reference date, it is noteworthy that the Basel Committee has waited six years to issue a public consultation after publicising its earlier concerns around this issue.
In monitoring impact on repo markets, for example, the European Repo and Collateral Committee (ERCC) of the International Capital Markets Association (ICMA) has published a report on repo market performance and conditions over the “turn” of the year since 2016.
It notes that year-end repo market pricing and liquidity are generally a focus of market attention, with the euro market proving particularly vulnerable to significant dislocations in recent years.
In its latest report, published on 29 January 2024, the ICMA ERCC suggests that, following an expensive but relatively calm 2022 year-end and a year of central bank ‘normalisation’ of monetary policy, the 2023 turn was never expected to be as problematic as previous year-ends. “ In many ways, the interest was largely to see how ‘normal’ the end of 2023 would be,” says the report.
The report concluded that, compared to previous year-ends, the 2023 turn for the euro repo market proved to be relatively unexceptional. “While the market began pricing in around 250bp premium for German GC and 150bp premium for French GC back in October, this continued to erode as we got closer to the end of the year, ultimately trading around 60bp and 40bp rich respectively,” it states. Non-core euro GC was even less spectacular, tightening by around 15bp.
It attributes this “relative calmness” over the turn to a confluence of factors, including an increased supply of government bonds, lower levels of excess reserves, a shift in positioning by hedge fund traders, and reduced pressure on dealer intermediation arising from regulatory capital and reporting obligations.
The Committee has put forward changes designed to limit banks' ability to lower their G-SIB scores through this so-called window dressing, for example by unwinding trading exposures in the lead-up to reporting dates.
It will do so by requiring banks falling into scope of the Global Systemically Important Bank (G-SIB) framework to report and disclose G-SIB indicators based on average values over the reporting year, rather than by using year-end values.
The BCBS argues in the consultation paper that such window-dressing behaviour by banks is unacceptable. “Such behaviour undermines the intended policy objective of the Committee’s standards and risks disrupting the operations of financial markets,” says the BCBS.
It notes that this regulatory arbitrage behaviour seeks to temporarily reduce banks’ perceived systemic footprint over the reference dates employed for reporting and public disclosure of G-SIB scores.
Respondents to the public consultation are asked to file their comments to the BCBS by 7 June 2024.
The Basel Committee has been monitoring perceived dislocations over reporting dates and potential “reporting arbitrage behaviour” for a number of years.
In an October 2018 statement, for example, it flagged up “heightened volatility” in some segments of the money markets and derivatives markets around reference dates — particularly over quarter-end reporting dates — and indicated that this had alerted the Committee to “potential regulatory arbitrage by banks”.
“A particular concern is window dressing, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios,” says the BCBS in this 2018 statement.
At this time, it advised that banks should “desist” from undertaking transactions with “the sole purpose of reporting and disclosing higher leverage ratios at reporting days only”.
It recommended that financial supervisors might also consider requiring more frequent reporting of transaction volumes by in-scope firms, particularly between current reference dates. This should be accompanied by further public disclosures to monitor the impact on bank leverage of transaction volumes between reporting dates.
Recognising the impact that banks’ preparations for year-end reporting can have on transaction activity for several months prior to the reference date, it is noteworthy that the Basel Committee has waited six years to issue a public consultation after publicising its earlier concerns around this issue.
In monitoring impact on repo markets, for example, the European Repo and Collateral Committee (ERCC) of the International Capital Markets Association (ICMA) has published a report on repo market performance and conditions over the “turn” of the year since 2016.
It notes that year-end repo market pricing and liquidity are generally a focus of market attention, with the euro market proving particularly vulnerable to significant dislocations in recent years.
In its latest report, published on 29 January 2024, the ICMA ERCC suggests that, following an expensive but relatively calm 2022 year-end and a year of central bank ‘normalisation’ of monetary policy, the 2023 turn was never expected to be as problematic as previous year-ends. “ In many ways, the interest was largely to see how ‘normal’ the end of 2023 would be,” says the report.
The report concluded that, compared to previous year-ends, the 2023 turn for the euro repo market proved to be relatively unexceptional. “While the market began pricing in around 250bp premium for German GC and 150bp premium for French GC back in October, this continued to erode as we got closer to the end of the year, ultimately trading around 60bp and 40bp rich respectively,” it states. Non-core euro GC was even less spectacular, tightening by around 15bp.
It attributes this “relative calmness” over the turn to a confluence of factors, including an increased supply of government bonds, lower levels of excess reserves, a shift in positioning by hedge fund traders, and reduced pressure on dealer intermediation arising from regulatory capital and reporting obligations.
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