October 11, 2012
http://www.bis.org/press/p121011.htm
The Basel Committee on Banking Supervision issued today its Framework for dealing with domestic systemically important banks.
In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). The G20 leaders endorsed these rules at their November 2011 meeting and asked the Basel Committee and the Financial Stability Board to work on extending the framework to domestic systemically important banks (D-SIBs).
While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-systemic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. 1 The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the impact of the failure of a domestic systemically important bank could be significantly greater than that of a non-systemic institution. The principles developed by the Committee address this issue while retaining national flexibility to accommodate the specific characteristics of domestic financial systems. The framework will complement the measures on global systemically important banks announced last year, and contribute to a safer and sounder financial system."
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A framework for dealing with domestic systemically important banks - final document
October 2012
The framework text sets out the Basel Committee's framework for dealing with domestic systemically important banks.
Background
In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). The G20 leaders endorsed these rules at their November 2011 meeting and asked the Basel Committee and the Financial Stability Board to work on extending the framework to domestic systemically important banks (D-SIBs).While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-system
Excerpts:
I. Introduction
1. The Basel Committee on Banking Supervision (the Committee) issued the rules text on the assessment methodology for global systemically important banks (G-SIBs) and their additional loss absorbency requirements in November 2011. The G-SIB rules text was endorsed by the G20 Leaders at their November 2011 meeting. The G20 Leaders also asked the Committee and the Financial Stability Board to work on modalities to extend expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs).
2. The rationale for adopting additional policy measures for G-SIBs was based on the “negative externalities” (ie adverse side effects) created by systemically important banks which current regulatory policies do not fully address. In maximising their private benefits, individual financial institutions may rationally choose outcomes that, from a system-wide level, are sub-optimal because they do not take into account these externalities. These negative externalities include the impact of the failure or impairment of large, interconnected global financial institutions that can send shocks through the financial system which, in turn, can harm the real economy. Moreover, the moral hazard costs associated with direct support and implicit government guarantees may amplify risk-taking, reduce market discipline, create competitive distortions, and further increase the probability of distress in the future. As a result, the costs associated with moral hazard add to any direct costs of support that may be borne by taxpayers.
3. The additional requirement applied to G-SIBs, which applies over and above the Basel III requirements that are being introduced for all internationally-active banks, is intended to limit these cross-border negative externalities on the global financial system and economy associated with the most globally systemic banking institutions. But similar externalities can apply at a domestic level. There are many banks that are not significant from an international perspective, but nevertheless could have an important impact on their domestic financial system and economy compared to non-systemic institutions. Some of these banks may have cross-border externalities, even if the effects are not global in nature. Similar to the case of G-SIBs, it was considered appropriate to review ways to address the externalities posed by D-SIBs.
4. A D-SIB framework is best understood as taking the complementary perspective to the G-SIB regime by focusing on the impact that the distress or failure of banks (including by international banks) will have on the domestic economy. As such, it is based on the assessment conducted by the local authorities, who are best placed to evaluate the impact of failure on the local financial system and the local economy.
5. This point has two implications. The first is that in order to accommodate the structural characteristics of individual jurisdictions, the assessment and application of policy tools should allow for an appropriate degree of national discretion. This contrasts with the prescriptive approach in the G-SIB framework. The second implication is that because a D-SIB framework is still relevant for reducing cross-border externalities due to spillovers at regional or bilateral level, the effectiveness of local authorities in addressing risks posed by individual banks is of interest to a wider group of countries. A framework, therefore, should establish a minimum set of principles, which ensures that it is complementary with the G-SIB framework, addresses adequately cross-border externalities and promotes a level-playing field.
6. The principles developed by the Committee for D-SIBs would allow for appropriate national discretion to accommodate structural characteristics of the domestic financial system, including the possibility for countries to go beyond the minimum D-SIB framework and impose additional requirements based on the specific features of the country and its domestic banking sector.
7. The principles set out in the document focus on the higher loss absorbency (HLA) requirement for D-SIBs. The Committee would like to emphasise that other policy tools, particularly more intensive supervision, can also play an important role in dealing with D-SIBs.
8. The principles were developed to be applied to consolidated groups and subsidiaries. However, national authorities may apply them to branches in their jurisdictions in accordance with their legal and regulatory frameworks.
9. The implementation of the principles will be combined with a strong peer review process introduced by the Committee. The Committee intends to add the D-SIB framework to the scope of the Basel III regulatory consistency assessment programme. This will help ensure that appropriate and effective frameworks for D-SIBs are in place across different jurisdictions.
10. Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principlesic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
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