Comparing methods for identifying G-SIBs in Europe

Abstract

The extra loss absorbency requirement for global systemically important banks (G-SIBs) is one of the macroprudential reforms in Basel III aimed at lowering the systemic risk in the financial system. Systemic risk is difficult to define and measure and academics have proposed alternative ways to measure banks' systemic importance. This study analyses how the rankings of systemically important banks in Europe differ between the G-SIB methodology and the SRISK measure of systemic risk proposed by Brownlees and Engle (2016). In contrast to previous studies, this is the first study that empirically and theoretically compares the G-SIB classification methodology with a systemic risk measure proposed by academics. The study contributes to existing research by bridging the gap between the regulatory and academic approaches for measuring systemic risk and by providing an up-to-date view of systemic risk levels in Europe. I show that the two methods give similar rankings most of the time but some large inconsistencies are observed as a result of that regulators' and academics' view on systemic risk does not align. The results also indicate that the systemic risk level in Europe is currently at its lowest since 2005.