Quantcast
Channel: Myth n Reality
Viewing all articles
Browse latest Browse all 3

Boosting central bank armouries, Need to contain systemic risks from banks

0
0

The longer the financial crisis continues , the greater the proliferation of rules we are likely to witness ! If individual countries have been quick to recast their legal and other regulatory frameworks, the Bank for International Settlements (BIS) has not been far behind in trying to devise globally accepted standards that ensure some comparability across borders. 


Following the Basel Committee on Banking Supervision’s guidelines for globally systemically important banks (G-SIBs framework) in November 2011, the BIS, in its latest consultative paper, has devised a set of guidelines for domestically (as opposed to globally) systemically important banks (the D-SIBs framework). 


The rationale for additional policy measures for G-SIBs is based on ‘negative externalities’ - the fact that banks do not take into account the impact of the failure of large, interconnected global financial institutions on the financial system and the real economy. D-SIB guidelines , likewise, are based on the realisation that similar externalities can apply at a domestic level. 
There are many banks that are not significant from an international perspective.

Nevertheless, they could have an important impact on their domestic financial system and economy compared to non-systemic institutions; a view that is echoed by the Reserve Bank of India in its latest Financial Stability Report, (June 2012). 


According to the RBI, the maximum potential loss to the banking system due to the failure of the ‘most connected’ banks has risen during 2011. How can these risks be contained? What are the safeguards regulators need to put in place to prevent D-SIBs from creating havoc within domestic economies ? The BIS draft paper suggests the following 12 principles. 


Principle 1: National authorities should establish a methodology for assessing the degree to which banks are systemically important in a domestic context. 


Principle 2: The assessment methodology for a D-SIB should reflect the potential impact of, or externality imposed by a bank’s failure. 


Principle 3: The reference system for assessing the impact of failure of a D-SIB should be the domestic economy. 


Principle 4: Home authorities should assess banks for their degree of systemic importance at the consolidated group level, while host authorities should assess subsidiaries in their jurisdictions. 


Principle 5: The impact of a DSIB’s failure on the domestic economy should be assessed having regard to bank-specific factors: (a) Size; (b) Interconnectedness; (c) Substitutability/financial institution infrastructure and (d) Complexity (including additional complexities from crossborder activity). 


Principle 6: National authorities should undertake regular assessments of the systemic importance of the banks in their jurisdictions. The interval between D-SIB assessments must not be significantly longer than the GSIB assessment frequency. 


Principle 7: National authorities should disclose information on the methodology employed to assess the systemic importance of banks in their domestic economy. 


Principle 8: National authorities should document the methodologies and considerations used to calibrate the amount of higher loss absorbency (HLA) that the framework requires for D-SIBs in their jurisdiction. 


Principle 9: The higher loss absorbency requirement imposed on a bank should be commensurate with the degree of systemic importance. 


Principle 10: National authorities should ensure that the application of the G-SIB and D-SIB frameworks is compatible within their jurisdictions. The home authority should test that the parent bank is adequately capitalised on a standalone basis. Home authorities 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 a G-SIB . 


Principle 11: 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. 


Principle 12: The HLA requirement should be met fully by Common Equity Tier 1. In addition, national authorities should put in place any additional requirements and other policy measures they consider to be appropriate to address the risks posed by a D-SIB . For the RBI, wrestling with the problem of how best to contain systemic risks, these principles could not be more timely. The bank should have no problem with any of the suggestions. 


Principle 7 requires national authorities to disclose information on the methodology employed to assess the systemic importance of banks in their domestic economy. Unfortunately , transparency has never been one of RBI's strengths. Will the BIS be able to change that? 


BIS consultative paper June 2012: Aframework for dealing with domestic systemically important banks


Viewing all articles
Browse latest Browse all 3

Latest Images

Trending Articles





Latest Images