Which Banks Are Considered “Too Big to Fail”?

The concept of “too big to fail” (TBTF) describes a situation where the failure of a large financial institution could trigger a widespread collapse across the financial system and economy. This interconnectedness often necessitates government intervention to prevent catastrophic consequences. The core issue is systemic risk, where the distress of one entity cascades throughout the financial network.

Understanding Systemic Importance

Certain financial institutions are considered systemically important due to their extensive reach and deep integration within the global financial system. Their size, complex operations, and high transaction volume make them central to market functioning. The failure of such an institution could disrupt critical financial services, including payment systems, credit provision, and market liquidity, potentially spreading distress to other banks and businesses.

Systemic importance stems from vast financial networks and services that lack readily available alternatives. For example, a bank’s failure could halt transactions for countless businesses and individuals, creating widespread economic paralysis. Policymakers recognize that the potential for such widespread disruption justifies special oversight for institutions whose stability is essential for overall financial health.

Criteria for Designation

The Financial Stability Board (FSB) identifies Global Systemically Important Banks (G-SIBs) using a specific methodology. This assessment relies on five main categories of indicators, each measuring a distinct aspect of systemic risk: size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity.

Size reflects the institution’s overall scale, as larger entities generally pose a greater potential for disruption if they fail. Interconnectedness measures the extent of a bank’s financial linkages with other institutions, indicating its potential to transmit shocks across the system. Substitutability assesses how easily other institutions could replace the services provided by the bank, with a low degree of substitutability indicating higher systemic importance. Complexity accounts for the intricacy of a bank’s legal structure and financial instruments, which can complicate an orderly resolution. Cross-jurisdictional activity captures the global footprint of a bank, recognizing that international operations can amplify spillover effects from distress or failure.

Current Global Systemically Important Banks

The Financial Stability Board (FSB) annually publishes a list of Global Systemically Important Banks (G-SIBs), updated based on year-end data. The 2024 list identifies 29 institutions as G-SIBs. These banks are categorized into “buckets” based on their systemic importance score, with higher buckets corresponding to increased capital requirements.

Two banks experienced changes in their bucket assignments for 2024: Groupe Crédit Agricole moved from bucket 1 to bucket 2, while Bank of America shifted from bucket 3 to bucket 2. The highest category, bucket 5, remains unoccupied. The capital buffer requirements established by the 2024 list are scheduled to become effective on January 1, 2026.

The following institutions are designated as Global Systemically Important Banks for 2024, grouped by their respective buckets, with bucket 5 currently empty:

Bucket 4 (2.5% higher capital requirement):
JPMorgan Chase

Bucket 3 (2.0% higher capital requirement):
Bank of America
Citigroup
HSBC Holdings plc

Bucket 2 (1.5% higher capital requirement):
Agricultural Bank of China
Bank of China
BNP Paribas
Groupe Crédit Agricole
Industrial and Commercial Bank of China
Mitsubishi UFJ Financial Group

Bucket 1 (1.0% higher capital requirement):
Bank of New York Mellon
Barclays
BBVA
China Construction Bank
Commerzbank
Credit Suisse
Deutsche Bank
Goldman Sachs
Groupe BPCE
ING Bank
Mizuho Financial Group
Morgan Stanley
Royal Bank of Canada
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui Financial Group
UBS Group AG
Wells Fargo

Regulatory Framework for Systemic Banks

Banks designated as G-SIBs are subject to an enhanced regulatory framework designed to mitigate risks to the financial system. A primary measure is higher capital surcharges, which are additional capital buffers banks must hold above standard requirements. These surcharges are determined by the bank’s assigned bucket, with higher systemic importance leading to larger capital requirements. For example, the lowest bucket requires an additional 1.0% of risk-weighted assets, escalating to 3.5% for the highest bucket.

Beyond capital, G-SIBs must adhere to Total Loss-Absorbing Capacity (TLAC) standards. TLAC ensures a failing G-SIB has sufficient equity and debt resources to absorb losses and facilitate recapitalization without relying on taxpayer bailouts. This mandates a buffer of bonds or equity, convertible to equity in a crisis, to support an orderly resolution.

Stress testing is another integral component of regulatory oversight for G-SIBs. These banks undergo rigorous supervisory stress tests that assess their resilience to severe hypothetical economic conditions. This process evaluates how a bank’s capital levels, revenues, and expenses would perform under adverse scenarios, ensuring they can withstand significant financial shocks.

G-SIBs are also mandated to develop “resolution plans,” commonly known as “living wills.” These detailed plans outline how the institution could be resolved in an orderly manner during a crisis, minimizing disruption to the financial system and avoiding public funds. The plans typically address winding down the bank, identifying options for divesting businesses, streamlining structures, and ensuring continuity of critical operations.