What Are Systemic Banks and Why Do They Matter to the Global Economy?

What is a Systemic Bank?

Systemic banks are financial institutions whose failure could have serious consequences for the financial system and the wider economy. These "too big to fail" banks have a sizable market share in critical areas of the financial system.

Systemic banks are subject to greater regulatory scrutiny and are often required to hold higher levels of capital and liquidity than other banks due to their importance. Several authorities label these banks as Systemically Important Financial Institutions (SIFIs), depending on their scale and influence on global and domestic financial markets.

Characteristics of Systemic Banks 

Systemic banks are defined by several key characteristics:

Size

The significant assets and market share of systemic banks means that their failure can have major ripple effects throughout the financial system.

Interconnectedness

The connection of systemic banks with other domestic and international financial institutions and markets can cause problems to spread quickly, leading to a wider financial crisis.

Complexity

The complexity of the financial activities of systemic banks, such as derivatives trading, can make it challenging to understand and manage problems.

Importance to the economy

Systemic banks play a crucial role in providing essential financial services to the economy, such as lending to businesses and individuals, and their failure could have significant negative consequences.

Regulatory oversight

Systemic banks are subject to more stringent regulatory oversight and more intensive supervisory and stress testing requirements.

Regulation of Systemic Banks

Regulatory oversight for systemic banks requires a minimum level of capital, regular stress tests and resolution plans to ensure a safe and orderly resolution in the event of financial distress, minimize potential risks to the wider economy and monitor compliance with regulations and risk management standards. Systemic banks may also face restrictions on certain activities to reduce their potential for creating systemic risks.

The effectiveness of the regulatory framework depends on various factors, including the quality of regulatory oversight, the ability of the banks to adapt to changing market conditions and risks, and the resilience of the wider financial system. Regulators must stay ahead of potential risks and banks must be willing to implement the necessary changes.

Potential risks and challenges 

The size and complexity of systemic banks can pose significant threats to the financial system. These include:

Moral hazard

Systemic banks may engage in risky behavior, knowing they will be bailed out if they fail, leading to excessive risk-taking and financial instability.

Systemic risk

The failure of systemic banks can cause widespread financial distress and trigger a systemic crisis due to their interconnectedness with other financial institutions.

Regulatory challenges

Regulating systemic banks can be difficult due to their size and complexity, and regulators must balance ensuring stability with promoting economic growth.

Too big to manage

The size and complexity of systemic banks can make them difficult to manage, leading to operational failure and contributing to financial instability.

Political risks

Government intervention in systemic banks can create accusations of favoritism or cronyism, eroding public trust in the financial system and undermining policies promoting stability.

Robust risk management frameworks are necessary to prevent systemic crises, and regulatory oversight ensures compliance with regulations and addresses the moral hazard problem. These measures are crucial for systemic stability and reducing the potential for financial instability.

Examples of Systemic Banks

Since 2011, the Financial Stability Board (FSB) has been issuing a list of global SIFIs (G-SIFIs),[1] such as Morgan Stanley, Barclays, Deutsche Bank, Citigroup, BNP Paribas, Goldman Sachs, UBS, HSBC, Bank of America, JPMorgan Chase and Wells Fargo.

Looking Ahead

Systemic banks are crucial for the economy but their failure can harm the global economy. Recent collapses, such as those of Silicon Valley Bank, Signature Bank and Credit Suisse, highlight the fragility and interdependence of the financial system, and the need for close scrutiny, regulation and oversight. Past incidents should guide policy decisions to ensure that systemic institutions remain resilient, accountable and relevant for the economy and society, promoting financial stability and sustainable economic growth.

[1] Global Systemically Important Financial Institutions (G-SIFIs) - Financial Stability Board (fsb.org)