Saturday, November 5, 2011

Global systemically important banks: Assessment methodology and the additional loss absorbency requirement

Global systemically important banks (G-SIBs): Assessment methodology and the additional loss absorbency requirement
Nov 04, 2011

The rules text sets out the Basel Committee's framework on the assessment methodology for global systemic importance, the magnitude of additional loss absorbency that global systemically important banks (G-SIBs) should have and the arrangements by which the requirement will be phased in. The cover note to the rules text sets out the Committee's summary and evaluation of the public comments received on the July 2011 consultative document. The rules text was finalised following a careful review of the public comments received. The work of the Basel Committee forms part of a broader effort by the Financial Stability Board to reduce the moral hazard of global systemically important institutions.

The rationale for the policy measures set out in the rules text is to deal with the cross-border negative externalities created by G-SIBs which current regulatory policies do not fully address. The measures will enhance the going-concern loss absorbency of G-SIBs and reduce the probability of their failure. 

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of readily available substitutes or financial institution infrastructure, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank's systemic importance with an empty bucket of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.