Is window dressing by banks systemically important?

BIS Working Papers  |  No 960  | 
12 August 2021



Are banks window dressing their balance sheets to avoid tougher regulation? We explore this question by studying the assessment of global systemically important banks (G-SIBs). We examine the evolution of the G-SIB "score" around supervisory reporting dates for a large sample of banks in the European Union (EU). The score is the regulatory measure that determines banks' G-SIB status and the attendant capital requirements. It predominantly relies on a snapshot of banks' balance sheets at year-end.


We illustrate how banks in the EU compress their G-SIB score at year-end. We approximate the score at quarterly frequency based on supervisory data and establish that G-SIBs' year-end adjustments differ markedly from those of other banks. Moreover, we highlight that these adjustments distort the supervisory assessment of banks' systemic importance. While a variety of factors may be driving banks' window dressing, we show that the tightness of capital requirements plays an important role and shed light on how the G-SIB rules interact with other regulatory requirements, such as national capital surcharges. 


Our analysis uncovers a large and systematic contraction in the score of EU G-SIBs at year-end. We show that several G-SIBs repeatedly lower their scores to an extent that they reduce their capital requirements. Moreover, a few banks appear to have avoided G-SIB designation altogether in some years. G-SIBs reduce their score in several ways, for instance by temporarily cutting back on intra-financial sector linkages and derivatives positions. G-SIBs with stronger capital ratios and those subject to higher national capital surcharges window dress less than other G-SIBs, which underscores the importance of regulation in banks' balance sheet decisions. Overall, our findings argue in favour of moving away from using point-in-time data in regulatory requirements and making greater use of averages. They also highlight the importance of supervisory judgment in the assessment of G-SIBs. This could help address banks' window dressing and mitigate any associated adverse impact on financial markets.


We study banks' year-end window dressing in the European Union to assess how it affects the identification of global systemically important banks (G-SIBs) and the associated capital surcharges. We find that G-SIBs compress their balance sheet at year-end to an extent that they can reduce their surcharges or avoid G-SIB designation altogether. G-SIBs use several levers to adjust their balance sheets. Most notably, they compress intra-financial system assets and liabilities as well as their derivative books at year-end. Moreover, G-SIBs that are more tightly constrained by capital requirements window dress more than their peers. Our findings underscore the importance of supervisory judgement in the assessment of G-SIBs and call for greater use of average as opposed to point-in-time data to measure banks' systemic importance.

JEL classification: G20, G21, G28

Keywords: systemically important bank, systemic risks, regulatory arbitrage, financial stability