Basel Committee publishes framework for D-SIBs

Introduction

On 11 October 2012, the Bank for International Settlements (BIS) published a framework for identifying and dealing with domestic systemically important banks (D-SIBs).

The purpose of the framework is to reduce the probability of D-SIB failure compared to non-systemic institutions.  In furtherance of this goal, 12 principles have been identified.  These establish a minimum set of requirements in relation to treatment of D-SIBs, whilst recognising the need for a degree of national discretion.  They can be applied both to consolidated groups and to branches within a host jurisdiction.  Broadly, the principles fall into two categories which define:

  • the assessment methodology for D-SIBs; and
  • higher loss absorbency (HLA) requirements for D-SIBs.

Assessment Methodology

Assessment methodologies should be public and clearly articulated with a focus is on the impact D-SIB failure would have on both the domestic financial system and the domestic economy.  In determining systemic importance, home authorities should consider banks from a (globally) consolidated perspective and host authorities should assess foreign subsidiaries in their jurisdictions on a consolidated basis which includes any downstream subsidiaries, some of which may be in other jurisdictions.  Annual assessments of the systemic importance of domestic banks should be conducted by reference to the following bank-specific factors:

  • size;
  • interconnectedness;
  • substitutability/financial institution infrastructure; and
  • complexity.

National authorities can also consider other factors that would inform the above list, such as the size of a bank relative to domestic GDP.

Higher Loss Absorbency

From January 2016, any institution identified as a D-SIB will be subject to an HLA requirement, which must be met fully by Common Equity Tier 1 through an extension of the Basel III capital conservation buffer.   Banks that are both D-SIBs and Global SIBs should be subject to the higher HLA requirement, but double counting should be avoided.  Specific HLA requirements should be commensurate with the D-SIB’s degree of systemic importance and could be affected by:

  • the resolution regimes (including recovery and resolution plans) in and between jurisdictions; and
  • available resolution strategies and any specific resolution plan in place for the firm.

 

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