In the wake of the global financial crisis, the Basel Committee
released a set of principles applicable to so-called global
systemically important banks (G-Sibs) and domestic systemically
important banks (DSibs).
These aimed to mitigate the negative externalities posed by
systemically important banks (Sibs) through global and/or local
markets. Following this, the Banking Regulatory and Supervisory
Authority (BRSA) introduced the Regulation on Systemically
Important Banks (the Regulation) on February 23 2016. The BRSA
enacted this Regulation to adopt, at a local level, the Basel
Committee's requirements for DSibs.
The Regulation sets out the:
assessment methodology for Sibs;
higher loss absorbency (HLA)
consequences of non-compliance with
The assessment methodology for Sibs is based on an
indicator-based measurement approach. This takes four factors into
consideration. These are the: size; interconnectedness; substitutability; and
complexity of the banks. Each category consists of individual
indicators; each indicator consists of sub-indicators.
To calculate systemic importance:
the amount of each individual
indicator is found by the aggregate of subindicators under the
relevant individual indicator;
the total amount of the individual
indicator for that bank is proportioned to the total amount of the
same individual indicator for all banks in the market. Consequently
the so-called indicator score is found for each indicator;
indicator scores under the same
category are aggregated to find the category score for each
each category score is multiplied
with the weighting ratios provided in the Regulation,
the weighted average of the category
scores is calculated and the bank's systemically importance
score is found.
The BRSA's Sib assessment methodology is as follows:
The first category is size. This consists of four individual
indicators, namely: (i) Inbalance sheet assets; (ii) off-balance
sheet assets; (iii) derivative financial instruments and credit
derivatives; and (iv) securities transactions or finance
transactions secured by commodities. The weighting for this
category is 40%.
The second category is interconnectedness. This consists of two
Individual Indicators, namely: (i) intrafinancial system assets;
and (ii) intra-financial system liabilities. The weighting for this
category is 20%.
The third category is substitutability. This
consists of three Individual Indicators, namely: (i) assets under
custody; (ii) payments cleared and settled through payment systems;
and (iii) the values of underwritten transactions in debt and
equity markets. The weighting for this category is 20%.
The fourth category is complexity. This consists of two
Individual Indicators, namely: (i) the nominal values of over the
counter (OTC) derivative transactions; and (ii) securities held for
trading and available for sale. The weighting for this category is
The BRSA will determine the threshold scores. Exceeding the
threshold will lead to the categorisation of a bank as a Sib. Sibs
are classified in three main groups, according to their level of
importance. However, the Regulation also provides for a blank
group. This will be used for banks whose systemically importance
score exceeds the threshold applicable to the highest of the main
three groups. If this blank group is used as the fourth group,
another blank group will be formed.
The BRSA will make the initial determination of the Sibs and
their grouping on the basis of the consolidated financials of
The HLA requirement
The Regulation further requires Sibs to comply with a loss
absorbency requirement, which is higher than those applicable to
non-Sibs. Accordingly, Sibs must keep an additional core capital
amount as a systemic bank buffer. This is in addition to the
BRSA's capital buffers applicable to banks other than Sibs. The
HLA requirement is found by multiplying the Sib buffer ratio
applicable to the relevant Sib group with the risk weighted assets
amount of that Sib on a consolidated basis.
Until January 1 2019, the HLA requirement will apply for each
year with the following ratios:
group one: 0.25 for 2016, 0.50 for
2017, and 0.75 for 2018;
group two: 0.375 for 2016, 0.75 for
2017, and 1.125 for 2018;
Group three: 0.5 for 2016, 1 for
2017, and 1.5 for 2018;
Group four (blank): 0.75 for 2016,
1.5 for 2017, and 2.25 for 2018.
Consequences of non-compliance
Failure to comply with the HLA requirement
will trigger regulatory measures such
as the limitation of dividend distribution
and delivery of a capital maintenance plan
to the BRSA
Originally published in IFLR/April 2016
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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