Consider Intermediation

During the last few years, the Basel-based Bank of International Settlements (BIS) has further emphasized a global monitoring role to keep tabs on what it calls “Global Systemically Important Banks” or “G-SIBs”. These are banks considered material to the well-being of the global financial system; or rather, put more to the point, a G-SIB is a bank whose failure would put a dent into the financial system, possibly impairing that system’s functioning and good order.

This is not a remote fear for the world, which was scared straight from the last decade’s “Great Recession”. And, the BIS has responded, developing a methodology to parse out institutions who could catalyze another crisis, and then recommending additional cushions of capital to bolster said institutions.

In its methodology, the BIS accounts for a bank’s size, its global interconnectedness, the bank’s substitutability or the relative breadth of its home country’s financial infrastructure, the bank’s global (cross-jurisdictional) activity, and the complexity of the bank’s activities.

In its review of the survey of global banks, as of year-end 2018 data, the BIS determined that appropriate sample size for the US was eleven designated banks. Interestingly, the Basel institution selected 15 Chinese lenders for that country’s sample review.

Maybe that shouldn’t be such a big deal. These days, China is many things. If you take a purchasing-power parity view, it’s the world’s largest economy. It is the world’s factory floor, and it is (forever) the coveted next global consumer market. It is a nexus of human activity, and it is an aspiring global power.

It is, as its prospective G-SIBs imply, a relevant link, possibly of hand-in-glove significance, in the global financial system. Global financial institutions are still operating under a cloud, deservedly so given the effects of the last global financial crisis. But, it’s interesting to think about what China’s G-SIBs present and the due diligence activities entailed.

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