Global banking regulators Thursday issued a set of principles for national regulators to follow in dealing with banks that are systemically important in their own countries.
In the wake of the financial crisis, which resulted in taxpayer-funded bailouts for a number of large financial firms, policymakers have sought to impose added requirements on banks that are deemed systemically important, and therefore unlikely to be allowed to fail.
Last November, the Basel Committee on Banking Supervision issued rules for banks that are considered systemically important at the global level. On Thursday, it published a framework for dealing with domestic systemically important banks.
“While not all [domestic systemically-important banks] 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. Some of these banks may have cross-border externalities, even if the effects are not global in nature,” it says.
So, the Basel Committee developed a set of 12 principles on the assessment methodology and the higher loss absorbency requirement for these firms; which, it says, complements the framework for globally significant banks “by focusing on the impact that the distress or failure of banks will have on the domestic economy.”
None of the Canadian banks were deemed systemically important at the global level, at least in the initial assessments. It will be up to local authorities, such as the Office of the Superintendent of Financial Institutions (OSFI), to determine which banks may be considered systemically important at the national level.
The principles published Thursday don’t set a specific level for higher capital requirements, saying that they should be calibrated by local regulators based on the degree of systemic importance. Determining that significance should include considerations such as: size, interconnectedness, competition, and complexity; and it says that regulators should publicly disclose their methodology for assessing the systemic importance of banks in their domestic economy.
“The assessment process used needs to be clearly articulated and made public so as to set up the appropriate incentives for banks to seek to reduce the systemic risk they pose,” it says, adding that this gives banks and others insight into how they can affect their systemic importance score and thereby their added capital requirements.
The framework indicates that the added requirements should be commensurate with the degree of systemic importance. “This is to provide the appropriate incentives to banks which are subject to the [added capital] requirements to reduce (or at least not increase) their systemic importance over time,” it says.
The committee suggests that banks that are identified as systemically important by their national authorities should be required, by their local regulators, to comply with the principles in line with the phase-in arrangements for the global framework (starting in January 2016).
“The impact of the failure of a domestic systemically important bank could be significantly greater than that of a non-systemic institution. The principles developed by the committee address this issue while retaining national flexibility to accommodate the specific characteristics of domestic financial systems,” said Stefan Ingves, chairman of the Basel Committee and Governor of Sveriges Riksbank. “The framework will complement the measures on global systemically important banks announced last year, and contribute to a safer and sounder financial system.”