Santander's importance to the financial system is reflected in its designation as a global systemically important financial institution.


Each year, the Financial Stability Board (FSB), along with the Basel Committee and each country's national authorities, review the list of global systemically important institutions. 

Why was the global systemically important bank category created? 

During the financial crisis that began in 2007, the public sector was required to step in to restore financial stability – with a resulting cost to taxpayers – as a result of the bankruptcy or deterioration of a large number of financial institutions.

At that time, it became clear that additional measures were needed to reduce both the likelihood of bankruptcy of financial institutions as well as the severity of the effects of any such bankruptcy. The Basel Committee on Banking Supervision adopted a series of reforms to increase the resilience of the banks and of the banking system in general. It adopted additional policies for systemically important institutions in order, among other things, to contend with possible contagion from these institutions to others, and to reduce the moral hazard arising from the expectation that governments would support systemically important institutions. This could amplify risk-taking or reduce market discipline, giving rise to greater market distortions and increasing the likelihood that assistance would have to be provided in the future.

Why are we classified as a global systemically important bank? 

The Basel Committee developed a methodology to identify global systemically important financial institutions based on one of the following indicators as well as an institutions’ relative weight:

  • Size (20%):
    • The larger a bank, the more difficult it is to quickly replace its activities with those of other banks and the greater the likelihood that its bankruptcy or deterioration will disrupt the financial markets in which it operates.
    • Size is determined by measuring all exposures taken into account to calculate the leverage ratio.
       
  • Globality (20%):
    • The larger a bank’s global reach, the more difficult it is to coordinate its resolution and the broader the effects of its bankruptcy.
    • Globality is determined by measuring an institution's assets and liabilities with other jurisdictions. 
       
  • Interconnectivity (20%):
    • An institution's deterioration may materially increase the likelihood of deterioration of other institutions due to the network of contractual obligations in which firms operate.
    • Interconnectivity is determined by measuring: (i) intra-financial system assets; (ii) intra-financial system liabilities; and (iii) outstanding securities.
       
  • Substitutability (20%):
    • The less substitutable an institution as a market participant and service provider, and the more important its role as a market infrastructure provider, the greater its impact in a situation of deterioration.
    • Substitutability is determined by measuring: (i) assets under custody; (ii) payment activity; and (iii) underwriting operations in the equity and fixed income markets.

The fact that size was not the only indicator for identifying global systemically important institutions was beneficial to Santander, otherwise it would have been considered to be of greater systemic importance. Santander argued that, in addition to size, other key components should be taken into account, namely: an entity's interconnectivity with other market participants, the complexity of its operations and its market presence. This has enabled Santander to highlight its retail and commercial banking business model, characterised by subsidiaries that are autonomous in liquidity and capital and have little interconnectivity, and to be considered less systemically important than other, smaller firms.

The highest-scoring institutions are classified as global systemically important financial institutions (G-SIFIs). 

The 2019 list comprises 30 banks from various countries. 
 

Larger security network 

Given systemic banks' weight in the financial system, they must comply with additional requirements, intended to:

  • Reduce the likelihood of their bankruptcy, by increasing their loss-absorbing capacity; and 
  • Reduce the scope and impact of such bankruptcies, by improving their viability and resolution frameworks.
Systemic banks are more exhaustively supervised, have additional capital and loss-absorbing requirements, and are subject to a resolvability review by international authorities. Together with the resolution plan, this ensures that in the event of a crisis a bank's critical functions, and the protection of its depositors, are guaranteed.

Santander is therefore subject to more stringent rules than are other, non-systemic players, which means that it is better prepared to cope with crisis scenarios. 
 

The 1% league 

The additional capital requirements of global systemic institutions range from 1% to 2.5% (according to their systemic importance), in the form of CET1 capital. 

According to our tally, Santander is at the lower end of this range. This is equivalent to a capital buffer of 1% of its total risk exposure in 2019.

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