Rationale for Keeping the Cap on the Substitutability Category for the G-SIB Scoring Methodology

Rationale for Keeping the Cap on the Substitutability Category for the G-SIB Scoring Methodology

The Clearing House published a new research note which evaluates the cap on the substitutability category used in the calculation of the global systemically important banks (G-SIB) systemic importance score. This evaluation is based on a market-based measure of systemic risk and U.S. banks’ systemic risk reports (FR Y-15). The substitutability scores of a few U.S. institutions are disproportionally large, and this score is currently capped to prevent it from having a disproportionate impact on the overall measure of systemic risk. Our findings indicate that removing the cap on the substitutability score would reduce the economic and statistical significance of the substitutability category in explaining systemic risk. As a result, the cap on the substitutability category score makes the overall score more accurate in achieving its stated goal.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.