The G-SIB capital requirements apply from 1 January 2016
and are in addition to the Basel III capital conservation and
On 4 November 2011, the Basel Committee on Banking Supervision
issued its framework for global systemically important banks
(G-SIBs). The framework covers the assessment
methodology for G-SIBs, the magnitude of additional loss absorbency
that G-SIBs should have and the arrangements by which the framework
will be phased in.
Importantly, some of the framework requirements will be subject
to additional testing by March 2012 via updated bank data.
The framework assessment methodology is founded on an
indicator-based approach and comprises five broad categories used
to determine a banks systemic importance: size, interconnectedness,
lack of readily available substitutes or financial institution
infrastructure, global (cross-jurisdictional) activity and
complexity. The methodology gives an equal weight of 20% to each of
the five categories listed.
Interestingly, the framework rules also provide for the
introduction of a "supervisory judgment" overlay, which
can be used to support the results from the indicator-based
measurement approach, or in exceptional circumstances to override
the indicator-based measurement of G-SIBs. This judgment is,
however, subject to international peer review to ensure consistency
in its application. Where this judgment is resorted to it is
intended to supplement the qualitative information in relation to a
G-SIB for any particular indicator category.
According to the framework rules, a G-SIB will, depending on the
results of the assessment methodology outlined above, fall into one
of four "buckets" requiring them to hold an additional
1%, 1.5%, 2.0% or 2.5% of Common Equity Tier 1
(CET1). CET1 represents the highest quality
capital a bank can hold and comprises common equity and retained
The Basel Committee has also indicated that as a means of
discouraging G-SIBs from becoming even more systemically important
it is open to including an additional 3.5% CET1 bucket. The rules
text note that these levels of additional loss absorbency are set
at a minimum and therefore national jurisdictions may impose higher
requirements on their banks, should they wish to do so.
Introduction of capital requirements
The G-SIB capital requirements apply from 1 January 2016 and are
in addition to the Basel III capital conservation and
countercyclical buffers. The assessment methodology for G-SIBs will
be reviewed every three years to ensure it captures developments in
the banking sector and any progress in methods and approaches for
measuring systemic importance.
The Basel Committee is of the view that the number of G-SIBs
will initially be 29 but it is believed that this number will
change over time as banks adapt their behaviour in response to the
G-SIB framework. It is not expected that any Australian banks will
be among the initial 29 G-SIBs.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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Material adverse effect clauses are prevalent in Australian loan documentation.
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