The Basel Committee on Banking Supervision has launched a consultation to address “window-dressing” by global systemically important banks, highlighting the need to address a practice that can have regulatory implications.
Window-dressing refers to the practice of reducing certain balance sheet items ahead of anticipated reporting dates to appear safer and therefore hold less loss-absorbing buffers. G-SIBs fall into five buckets, each corresponding to a different level of loss absorbency requirements.
The extent of window-dressing has long been unclear, but the committee now has evidence to demonstrate that window-dressing can have a material influence on banks’ categorisation, the committee said.
“They’ve been talking about this for a long time,” said Giles Edwards, managing director of S&P Global Ratings. “I suppose they’ve got the mathematical proof that shows that there is a degree of window-dressing going on. It’s material enough that it could have led to banks being in different buckets.”
Potential revisions would require banks to disclose the indicators used to calculate G-SIB scores based on average values over the reporting year, rather than year-end values.
“I think it would be interesting to see how much pushback there is,” Edwards added.
“Even if the banks felt that [this] was an unfair allegation, it’s quite hard to say that it would be wrong to measure something in a different way through an averaging method. It is a perfectly logical way of measuring things.
“Banks might fall back on the cost–benefit argument as [the averaging method] will be more resource intensive. Our view is that an averaging method is likely to happen — it’s more around how it’s going to happen than whether it will take place,” he added.
Window-dressing causes several problems including the misidentification of G-SIBs; the mismeasurement of systemic importance; and potential liquidity evaporation in some markets. As such, it has broader implications for financial stability and monetary policy.
The committee is seeking industry feedback on possible averaging frequencies for key indicators. It will also decide whether changes would apply to some or all the banks in the annual G-SIB assessment exercise — a far larger cohort than the 29 currently designated G-SIBs.
The consultation, which launched in early March, is open for three months. Any changes would take effect from January 2027.
