29 June 2012

Dealing with domestic systemically important banks - Consultative document issued by the Basel Committee

In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). These rules, 'Global systemically important banks: assessment methodology and the additional loss absorbency requirement', were endorsed by the G20 Leaders at their November 2011 meeting. At that meeting, the G20 Leaders asked the Basel Committee and the Financial Stability Board to work on "the modalities to extend expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs)".

G-SIBs will be subject to an additional loss absorbency requirement over and above the Basel III requirements that are being introduced for all internationally active banks. This additional requirement is intended to limit the 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. 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.

Against this backdrop, the Basel Committee has developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. The proposed 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. However, the proposed D-SIB framework will take a principles-based approach, in contrast to the prescriptive approach of the G-SIB framework. This will allow an appropriate degree of national discretion in the assessment and application of policy tools in order to accommodate the structural characteristics of individual jurisdictions.

The proposed D-SIB framework requires banks identified as D-SIBs by their national authorities to comply with the principles from January 2016. This is consistent with the phase-in arrangements for the G-SIB framework and means that national authorities will establish a D-SIB framework by 2016. The Basel Committee will introduce a strong peer review process for the implementation of the principles. This will help ensure that appropriate and effective frameworks for D-SIBs are in place across different jurisdictions.

Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted: "Effective implementation of the proposed principles issued today will enhance the going-concern loss absorbency of systemically important banks and reduce the probability of their failure. This will complement the measures on global systemically important banks announced last year, and contribute to a safer and sounder financial system."

The Basel Committee welcomes comments on this consultative document untill Wednesday, 1 August 2012.

Full document

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