Is window dressing by banks systemically important?

Abstract

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.