Wednesday, July 20, 2011

Basel Committee: Assessment methodology and the additional loss absorbency requirement for global systemically important banks

Assessment methodology and the additional loss absorbency requirement for global systemically important banks - consultative document issued by the Basel Committee
July 19, 2011

The Basel Committee on Banking Supervision issued on July 19, 2011 a consultative document on Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

At its June 25, 2011 meeting, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee, agreed on the consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required loss absorbency and the arrangements by which they will be phased in.

Following the agreement, the GHOS submitted this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. The package including this consultative document was endorsed for publication at the FSB Plenary meeting on July 18, 2011.

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

Based on the current results of applying the assessment methodology, 28 banks would be subject to the additional loss absorbency requirement due to their global systemic importance. It should be noted that this number will likely evolve over time as banks change their behaviour in response to the incentives of the G-SIB framework. Moreover, the Basel Committee will address any outstanding data issues and re-run the proposed assessment methodology using updated data well in advance of the implementation date.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% loss absorbency would be applied in such circumstances.

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

Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the rationale for the policy measures proposed today is to deal with the cross-border negative externalities created by global systemically important banks which current regulatory policies do not fully address. The proposed measures will enhance the going-concern loss absorbency of global systemically important banks and reduce the probability of their failure. Along with the measures announced today by the Financial Stability Board, they will contribute to a safer and sounder banking and financial system".