A set of 12 principles composes the D-SIB framework (BCBS, 2012). The two key aspects that shape this methodology are:
1. the reference system for the assessment of systemic impact; and 2. the unit of analysis, i.e. the bank which is being concerned.
The Committee responds clearly to these questions, the appropriate reference system should be the domestic economy whereas the unit of analysis are banks from a (globally) consolidated perspective. In other words, the localization of the systemic risk event is the
domestic market and its magnitude has to be calibrated to the country specifics. Banks’ subsidiaries are studied at the consolidated state when its banking group is hosted by the domestic jurisdiction. Indeed, a banking group involved in cross-border activities potentially has significant spillovers to the domestic economy when its subsidiaries fail. In contrast with the host authorities which have to assess these foreign subsidiaries at a local level or sub-consolidated basis from their domestic economy. For example, Emporiki Bank was a Greek subsidiary of Crédit Agricole until 2012, from the French authority Crédit Agricole has to be studied at the consolidated perspective, i.e. taking into account Emporiki Bank’s activities. But from the Greek authority point of view, Emporiki Bank is in its scope as well as all its foreign subsidiaries but Crédit Agricole is not.
1.2 Principles for SIBs
The D-SIB methodology is designed as the G-SIB approach, 4 bank-specific factors are used instead of 5, size, interconnectedness, financial institution infrastructure and complexity. The size of the domestic economy is also required because countries with a larger banking sector relative to GDP are more likely to suffer from a D-SIB failure in its own jurisdiction. Banks can be classified as D-SIBs but not as G-SIBs when their domestic activities have no impact on the global economy but only on the domestic financial system. A bank identified as a G-SIB can also be classified as a D-SIB in any of the countries in which the bank has significant operations. However, banks with large global operations can be classified as a G-SIB but not as a D-SIB if those activities have no significant impact in any domestic economy (Deloitte, 2013). When the banking group has been identified as a G-SIB as well as a D-SIB in the home jurisdiction, the national authorities should impose the higher of either the D-SIB or G-SIB HLA requirements (BCBS, 2012). Indeed, the BCBC is setting minimum standards of capital, so an asymmetric treatment is set out for banks which are not G-SIBs but D-SIBs or both at the same time.
For a given bank, one could argue G-SIB HLA has to be higher than the D-SIB HLA because at the global level, the totality of its interconnections are known and not only its domestic linkages. Thus a global shock should lead to a bigger HLA requirement. However, the marginal effect of this global shock is less than the domestic shock, a global shock is more spread out than the domestic shock. As in an earthquake where the seismic magnitude and damages are greater the closer you are to the epicenter, the D-SIB HLA has to be higher than the G-SIB HLA when you face a domestic shock. Moreover, D- SIB can be viewed as the worst case because a bank is penalized although it is not a global actor. Banks identified as domestic actors probably want to grow until becoming principal actors but their growth is reduced due to the HLA requirement. However, given the repartition of systemic risk in five equal parts, 20% for each systemic risk factor in the G-SIB methodology, a bank could reduce one of those factors to increase its degree of interconnectedness and become a global actor without being further penalized. So far, no incentives have been considered to reduce the degree of interconnectedness or common exposure of a given financial system to an exogenous source of risk, which is the key element of systemic risk at a domestic level.
At the domestic level, Brämer and Gischer (2011) replace the cross-jurisdictional activ- ity by the Domestic sentiment. Another attempt has been made by Engle, Jondeau and Rockinger (2014) to identify D-SIB with the SRISK measure. Even if they have worked at the consolidated perspective for each bank, they have used their classic SRISK di- vided by the GDP of the country to identify D-SIB and so compare and rank banks at the European level according to their adjusted SRISK. However, to accurately deal with D-SIB two modification have to be done. First a domestic shock, not a global one should be applied. Thus, their DRISK has to be preferred to their SRISK. Second, adjusting
the SRISK figures according to the current GDP has no impact on the domestic ranking of banks because the denominator is the same for banks of a given country. They only highlight the size of the banking sector in the national economy although it would be promising to observe whether or not the national ranking of a given bank differ according to the localization and the magnitude of the shock (global or domestic).
In this paper, we compute market-based systemic risk measures using publicly avail- able data. We assume market efficiency because system bank-specific factors need to be included into the market return, which is the only element to gauge the choice of the system. The eurozone is an ideal example to challenge all SRMs because it implies taking into account not only national specifics but also supranational authorities like the European Central Bank (ECB), which is in charge of the monetary policy. Furthermore, dealing with national specifics becomes more and more important during a financial crisis because each country wants to protect its own banking system to avoid bank runs (Dia- mond and Dybvig, 1983).