26 August 2011

Final EBF response to BCBS consultation on assessment methodology and additional loss absorbency of G-SIBs

The European Banking Fedaration comes forward with a number of suggestions with a view to the presentation of a more elaborate proposal at the forthcoming G20 Summit in November 2011.

It is understood that international policy-makers have worked out a two-pronged solution to the systemic risk posed by banks. One of the initiatives is intended to reduce the probability of default of Global Systemically Important Banks (G-SIBs) by increasing their going-concern loss absorbency, while the other one is geared to reduce the impact of failure by means of recovery and resolution frameworks.

Key points:

• The incentives to resolvability should be taken on board in the proposed model.
• The framework should be extended to non-banking financial institutions.
• The assessment methodology should be sensitive to the total systemic risk of the whole sample and not only the relative position within the sample.
• The model should include risk-sensitive measures to complement and improve accounting figures.
• The benefits of diversification should be factored in for the sake of preserving the right incentives.
• Contingent capital should be eligible as a G-SIBs buffer instrument.
• The G-SIB buffer should be established as a distinct range above the capital conservation buffer to avoid the “cliff effect” of the restriction on distributions.
• The activities financed by an affiliate in the country and currency where it is domiciled should be considered local activities and not cross border.
• The nature of the EU single market should mean that intra-EU transactions are not treated as cross-jurisdictional activity.
• Any additional loss absorbency should only be required at the consolidated group level.
• The cumulative impact (on top of Basel III and national rules) remains a major concern, especially in the context of the still fragile economic recovery.
• Additional capital cannot be the only answer. Improved risk management practices and governance are central to systemic risk prevention.

Position

© EBF