|Işıl Ökten||Tolga Çabaklı|
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 sub-indicators.
To calculate systemic importance:
- the amount of each individual indicator is found by the aggregate of sub-indicators 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 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 December 2014.
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.
Işıl Ökten and Tolga Çabaklı