A third Chinese bank has joined the Financial Stability Board’s list of global systemically important banks, but business models among the group are very different.

Agricultural Bank of China became the 30th member of the Financial Stability Board’s (FSB) list of 30 global systemically important banks (G-SIBs) in November 2014. These banks are subject to extra capital requirements, more intense supervision and may ultimately be required to meet special rules for total loss-absorbing capacity (TLAC) to enable them to be resolved in the event of distress without placing excessive demands on public finances.

On the face of it, Agricultural Bank’s entry into the list looked inevitable, given its dramatic growth rate over the past decade. Its compound annual asset growth since 2003 is the highest of any G-SIB, at more than 17%. The other two Chinese G-SIBs, ICBC and Bank of China, are both also among the top five for fastest asset growth.

By contrast, two European banks, UBS and Crédit Agricole, dropped one notch on the FSB's list, following deleveraging and a reduction of their international reach. Unlike 2013, no European banks dropped out of the G-SIB list altogether.

Slow growing

UBS is the only G-SIB to have a smaller asset base in 2013 than 10 years previously. The other four slowest-growing G-SIBs are a varied list, including US and Japanese banks. The extra capital requirements imposed on UBS and Credit Suisse by Swiss regulators have clearly constrained balance-sheet growth, while restructuring programmes at Citigroup and ING – both of which needed state support during the financial crisis – have also caused asset growth to reverse since then.

Any extra capital requirements look most easily absorbed by the Chinese banks, which have much higher profitability than most other G-SIBs. Return on Tier 1 capital of more than 20% will enable organic capitalisation relatively quickly. The three Chinese banks have been excluded from the first round of TLAC requirements. This partly reflects stronger levels of core equity and higher deposit funding, both of which reduce the relevance of a buffer of bail-in debt. The other factor, however, is their state ownership, which means that bailing in shareholders has much the same effect as a bail-out.

The only Western bank that comes close to the Chinese levels of profitability is Wells Fargo. Intriguingly, it also has the best capital-to-assets ratio (CAR) in the entire group, a rough proxy for the Basel simple leverage ratio. This shows that high capitalisation is not necessarily a bar to good returns on capital. US banks dominate the list of highest CARs, partly due to greater regulatory focus on simple leverage by the US Federal Reserve. The Fed has required its G-SIBs to meet a leverage ratio of 6%, double the globally agreed Basel minimum. The other factor is US accounting standards, which allow banks to net derivatives exposures, unlike the international standards used elsewhere.

At the other end of the scale, Mizuho is the only non-European bank to punctuate a string of Europeans that have the lowest capitalisation levels. Along with five European banks, Mizuho has a CAR of less than 4%. All but two of the 10 banks with the lowest return on capital in 2013 were also European. This makes it challenging for European G-SIBs to build capital buffers like TLAC organically and recourse to investors may well be the only route available.

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