D-SIBs are a key area of focus because of the recognition that the failure of a large, purely domestic bank could have a substantial negative impact on the domestic financial system and on the national real economy. Systemic risk is by no means confined to the large cross border, interconnected G-SIBs that make up the original list of 29 banks.
The new set of principles highlights the importance of higher loss absorbency (HLA) requirements and other tools for D-SIBs. The framework requires national authorities to call for their identified D-SIBs banks to comply with the principles, emphasising the consequences of the failure to do so on the domestic economy. The new reforms will play a significant role in enhancing the stability of national financial systems, as they clear the way for national authorities to assess the importance of domestic banks from a systemic angle.
Implications for firms:
- Although it remains unclear how national authorities will exercise the discretion granted to them under the Basel Committee principles for D-SIBs, banks should be considering whether they are likely to be designated as D-SIBs by their national supervisory authorities.
- Prospective D-SIBs should assess the likely impact on them of higher capital (and also possibly liquidity) requirements, tougher requirements for recovery and resolution planning, and more intensive supervision.
- Banks will also have to consider whether the costs of tougher requirements of D-SIBs may necessitate changes to business models and operating structures.
- In countries where banks are expected to continue growing rapidly over the next few years, the authorities may need to consider how large they want their D-SIBs to become, and whether additional requirements should be imposed either to limit this growth or at least to protect against the failure of increasingly large banks. Such actions will reinforce the impact of regulatory requirements on banks' strategic choices.
In the detail
The framework specifies that loss-absorbency should be backed up by systemic importance and is based on the assessments conducted by the local authorities evaluating the impacts of failure on the local financial system and economy.
The assessment should permit an appropriate degree of national discretion to accommodate structural characteristics of the domestic financial system.
The implementation will be combined with strong peer review introduced by the committee, and the committee intends to add the D-SIB framework to the scope of the Basel III regulatory consistency assessment program, which will help to ensure that appropriate and effective frameworks for D-SIBs are in place across the various jurisdictions.
Moreover, it considers it appropriate for the national authorities to set the requirements for their identified D-SIBS, ensuring compliance with the principles in line with the phase-in arrangements for the G-SIB framework.
View the final Framework for Dealing with Domestic Systemically important banks (PDF 95 KB).
- National authorities should establish a methodology for assessing the degree to which banks are systemically important in a domestic context
- The assessment methodology for D-SIB should reflect the potential impact of or externality imposed by a bank's failure
- The reference system for assessing the impact of failure of D-SIB should be the domestic economy
- Home authorities should assess banks for their degree of systemic importance at the consolidated group level while host authorities should assess subsidiaries in their jurisdiction
- The impact of a D-SIB's failure on the domestic economy should, in principle be assessed with regard to bank-specific factors: size, Interconnectedness, substitutability/Financial institution infrastructure, and complexity
- National authorities should undertake regular assessment of the systemic importance of the banks in their jurisdiction to ensure that their assessment reflects the current state of the relevant financial systems and that the interval between a D-SIB assessment not be significantly longer than the G-SIB assessment frequency
- National authorities should publically disclose information that provides an outline on the methodology employed to assess the systemic importance of bank in their domestic economy
Higher Loss Absorbency
- National authorities should document the methodologies and considerations used to calibrate the level of HLA that the framework would require for D-SIBs in their jurisdiction
- The HLA requirement imposed on a bank should be commensurate with the degree of systemic importance
- National authorities should ensure that the application of G-SIBs and D-SIB framework to compatible within their jurisdictions. Home authorities should impose HLA requirements that they calibrate at the parent and or consolidated level, and should test that parent bank is adequately capitalized on a stand-alone basis, Should impose the higher of either the D-SIB or G-SIB HLA requirements in the case where the banking group has been identified as a D-SIB in the home jurisdiction as well as G-SIB. Host authorities, should impose HLA requirements that they calibrate at the sub-consolidated subsidiary level
- In cases where the subsidiary of a bank is considered to be a D-SIB by a host authority , home and host authorities should make arrangements to coordinate and cooperate on the appropriate HLA requirement, within the constraints imposed by relevant laws in the host jurisdiction
- The HLA requirements should be met fully by Common Equity Tier 1 (CET 1), and national authorities should put in place any additional requirements and other policy measures they consider to be appropriate to address the risk posed by a D-SIB