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