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 (D-Sibs). 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 D-Sibs.
The Regulation sets out the:
- assessment methodology for Sibs;
- higher loss absorbency (HLA) requirement; and
- consequences of non-compliance with HLA requirement.
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
To calculate systemic importance:
- the amount of each individual indicator is
found by the aggregate of sub-indicators under the relevant
- 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 scores under the same category are aggregated
to find the category score for each category;
- 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) In-balance 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) intra-financial 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 20%.
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
- group two: 0.375 for 2016, 0.75 for 2017, and 1.125 for
- Group three: 0.5 for 2016, 1 for 2017, and 1.5 for
- Group four (blank): 0.75 for 2016, 1.5 for 2017, and 2.25
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
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