Window dressing systemic importance: evidence from EU banks and the G-SIB framework

Building on previous research, we study banks' balance sheet year‐end patterns in the European Union (EU) to assess the impact on supervisory measures of their systemic importance. We find that some global systemically important banks (G‐SIBs) in the EU compress their balance sheet at year‐end to an extent that it allows them to reduce their systemic importance, thus potentially mitigating the impact of the G‐SIB capital surcharges or avoiding G‐SIB designation altogether. Since some year‐end adjustments are a common feature, we compare G‐SIBs' adjustments to those of other systemically important institutions (O‐SIIs) and observe that the compression of the latter banks' balance sheets is notably smaller. G‐SIBs' balance sheets adjustments reflect several drivers, with the most notable year‐end declines observed for intra‐financial assets and liabilities as well as banks' notional amounts of over‐the‐counter derivatives. Reduction is most pronounced for G‐SIBs characterised by comparatively high leverage. This evidence of possible window dressing underscores the importance of supervisory judgement in the assessment of G‐SIBs, which is indeed a core component of the identification process. We also suggest greater use of average as opposed to point‐in‐time data in the quantitative part of the G‐SIB identification process.