June 30, 2017

Comments on the consultative document: Global systemically important banks – revised
assessment framework, issued by the Basel Committee of Banking Supervision
Japanese Bankers Association
We, the Japanese Bankers Association (“JBA”), would like to express our gratitude
for this opportunity to comment on the consultative document: Global systemicallyimportant banks – revised assessment framework, issued on March 30, 2017 by theBasel Committee on Banking Supervision (“BCBS”).
We respectfully expect that the following comments will contribute to your furtherdiscussion.
[Executive summary]
We support the objective of the global systemically important banks (“G-SIB”)
assessment framework to introduce incentives for banks to change their risk profile, etc.
in ways that reduce their systemic spillover effects when they fail.
With respect to the proposed revisions to the G-SIB framework discussed in theConsultative Document, we agree with the revisions made from the perspective ofensuring a level playing field or capturing risks more appropriately. However, sufficientlead time should be provided to allow banks to develop a system for accurate
aggregation of figures that will be required under the revised assessment framework.
Furthermore, for the introduction of short-term wholesale funding (“STWF”) as a
new indicator presented as an issue for discussion, we oppose to it primarily due to thereason that it is not necessarily appropriate given that the BCBS’s publication in July
2013 states that systemic importance should be measured in terms of the loss-given
default (“LGD”).
In addition to the revisions proposed in the Consultative Document, we request theBCBS to review the methodology when in converting to Euro that are used for scoring
purposes (i.e. currently, spot rate as of the end of December). In particular, a fairmethodology that minimises the impact of a foreign exchange on scoring, such as“leveling of foreign exchange rates” by using an average of foreign exchange rates over
one or several years should be adopted.

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[Specific comments]
1. Removal of the cap on the substitutability category
We support the BCBS’s proposal to remove the cap on the substitutability category.
The current framework applies a cap only on the substitutability category inconsideration of effects on some specific financial institutions. This results in a highly
skewed framework which contradicts a level playing field and is inappropriate formeasuring the degree of systemic risk of financial institutions.
2. Expansion of the scope of consolidation to include exposures under insurance
subsidiaries
We support the BCBS’s proposal to expand the regulatory scope of consolidationin G-SIB framework to include exposures from insurance subsidiaries in G-SIB
category.
Similarly to the BCBS, it has been our concern that the risks presented byinsurance subsidiaries of baking groups are not even captured by both the G-SIB andglobally systemically important insurers (G-SII) frameworks. With the revision
proposed in the Consultative Document, those risks stemming from insurance
subsidiaries of banking groups should be covered.
3. Inclusion of a new indicator of trading volume in the substitutability category
If this indicator is to be added, its definition should be clarified and a sufficientlead time should be provided to develop a necessary system.
If the term “trading volume” (e.g. the treatment of trades via central counterparties(“CCP”)) is not specifically and explicitly defined, differences in interpretation may
result in inconsistent reporting across financial institutions. Therefore, the definition of“trading volume” needs to be carefully considered and determined.
As some financial institutions have not necessarily developed a sufficient systemfor calculating the trading volume, they will need a reasonable amount of time (i.e. atleast approximately three years given the situation at the time of implementing theG-SIB assessment framework) for developing a necessary framework (e.g. in-housesystem developments and the establishment of internal procedures, and dry-run) inorder to ensure complete and accurate aggregation.
4. Inclusion of a new indicator for short-term wholesale funding (“STWF”)
The BCBS should not introduce STWF as a new indicator for the reasons2described below.
Firstly, the size of STWF mainly affects the probability of default (“PD”). On theother hand, views on how it affects LGD vary as described in the ConsultativeDocument. The document, “Globally systemically important banks: updated assessment
methodology and the higher loss absorbency requirement,” issued by the BCBS in July
2013 sets out that global systemic importance should be measured in terms of theimpact that a bank’s failure can have on the global financial system and wider economy(i.e. LGD), rather than the risk that a failure could occur (i.e. PD). In light of theconcept of the G-SIB assessment framework where each bank’s systemic importance ismeasured in terms of LGD, adding the SWTF as a new indicator would not necessarily
be appropriate because the impact of the size of STWF on LGD is not sufficiently
identified.
Secondly, since STWF is already controlled by existing liquidity requirements (e.g.
Liquidity Coverage Ratio (“LCR”)), it would lead to regulatory overlap if the STWF isused as an indicator for assessing G-SIBs.
With the proposed STWF indicator, we are concerned that, for example, it is notpossible to distinguish repo transactions secured by U.S. treasury bonds from unsecured
large deposits or interbank transactions, and thus the use of the proposed indicator may
unintentionally result in imposition of a penalty even on highly-stable transactions.
Moreover, as most of STWF are assumed to be interbank transactions, it may overlap
with indicators in the interconnectedness category. Given this, if it is determined toinclude the STWF indicator, the BCBS needs to take certain measures to address theabove concerns, such as setting categories in accordance with the degree of funding
risks and by multiplying its weight to each category.
Also in the U.S. where the STWF indicator has already been introduced in theG-SIB capital surcharge framework applied to U.S.-based G-SIBs, the Report toPresident Trump issued by the U.S. Department of the Treasury on June 12, 2017provides a recommendation to review the framework for the U.S. G-SIB capitalsurcharge, including removal of STWF. Therefore, in consideration of this movement inthe U.S., the BCBS will also need to carefully discuss the proposed inclusion of theSTWF indicator from the perspective of global regulatory harmonisation.

35. Exchange rate to Euro applied for scoring purposes
The BCBS should adopt a fair methodology that minimises the impact of a foreignexchange on scoring in regards to the methodology used when in converting to Euro, forexample, enhancing the stability and predictability through “leveling of foreignexchange rates” using an average of foreign exchange rates over one or several years,
instead of the current spot rate as of the end of December.
Since systemic importance does not vary by daily foreign exchange rates, the scores
used for G-SIB assessment purposes should minimise the impact of fluctuation ofexchange rates and focus on the stability and predictability. With a view to addressing
the too-big-to-fail (“TBTF”) issue, it is preferable that G-SIBs identified through thatmethodology will be encouraged to strengthen self-directed controls over thosetransactions that are important for the financial system, etc.
Financial market volatility may overshoot when geopolitical risks materialise or inother similar cases. As a result, volatility of foreign exchange rates could have anextremely significant impact on scoring results under the current rule which requires theapplication of the spot rate for scoring purposes, as shown in the table in Appendix as
below. This may undermine the identification of the level of actual effects on thefinancial system, including activities during the period.
Even though financial institutions undertake self-reliant efforts to reduce the score ofimportant assessment indicators for the financial system, in other words, to mitigate
systemic risk, they will be significantly affected by an impact from the foreign exchange
market which is an external factor. This could lead to a situation that disincentivises
financial institutions to reduce risks.
Furthermore, in terms of the impact of volatility of foreign exchange rates on scoring,
there is a level playing field issue between financial institutions in those jurisdictions
adopting Euro as an underlying currency and other financial institutions.
Given the above, in order to enhance the stability and predictability of the scores used
for the G-SIB assessment purposes, incentivise financial institutions’ self-directed risk
reduction efforts and ensure the level playing field across jurisdictions, the BCBS
should adopt a fair methodology with respect to the converting to Euro used for scoring
purposes so that it can minimise the impact of foreign exchange on scoring through“leveling of foreign exchange rates” as discussed above.
4[Appendix]

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