Module: | MODULE B: RISK MANAGEMENT
Q329: Consider the following statements regarding the Global Systemically Important Financial Institutions (G-SIFIs) framework and systemic risk:
1. G-SIFIs are identified solely on the basis of their absolute domestic asset size, regardless of their cross-border activities.
2. Systemic interconnectedness implies that the severe financial distress of one major institution rapidly transmits to other market participants via direct counterparty exposures.
3. The Financial Stability Board, in consultation with the Basel Committee, is responsible for annually identifying and categorizing G-SIFIs globally.
Which of the statements given above is/are correct?
2. Systemic interconnectedness implies that the severe financial distress of one major institution rapidly transmits to other market participants via direct counterparty exposures.
3. The Financial Stability Board, in consultation with the Basel Committee, is responsible for annually identifying and categorizing G-SIFIs globally.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: The identification of Global Systemically Important Financial Institutions (G-SIFIs) is a multi-dimensional process.
Absolute domestic size is just one factor.
The Basel framework explicitly evaluates cross-jurisdictional activity (international footprint), interconnectedness, complexity (like massive derivative portfolios), and substitutability.
Statement 2 is correct: This is the precise definition of systemic interconnectedness.
It is the core driver of contagion risk, where the failure of one "Too Big To Fail" entity triggers a domino effect, bankrupting other healthy institutions because they hold direct financial exposures (loans, derivatives, deposits) to the failing entity.
Statement 3 is correct: Globally, the Financial Stability Board (FSB), operating in close coordination with the Basel Committee on Banking Supervision (BCBS) and national authorities, holds the mandate to formally identify, categorize, and publish the list of G-SIBs every year in November.
Absolute domestic size is just one factor.
The Basel framework explicitly evaluates cross-jurisdictional activity (international footprint), interconnectedness, complexity (like massive derivative portfolios), and substitutability.
Statement 2 is correct: This is the precise definition of systemic interconnectedness.
It is the core driver of contagion risk, where the failure of one "Too Big To Fail" entity triggers a domino effect, bankrupting other healthy institutions because they hold direct financial exposures (loans, derivatives, deposits) to the failing entity.
Statement 3 is correct: Globally, the Financial Stability Board (FSB), operating in close coordination with the Basel Committee on Banking Supervision (BCBS) and national authorities, holds the mandate to formally identify, categorize, and publish the list of G-SIBs every year in November.