Defining Global Systemically Important Banks and Additional Loss Absorbency Requirements

Defining Global Systemically Important Banks and Additional Loss Absorbency Requirements

On 19 July 2011, the Basel Committee on Banking Supervision ("BCBS") and the Financial Stability Board ("FSB") published two papers relating to entities regarded as globally systemic important financial institutions ("G-SIFIs"). The first paper prepared by the BCBS which we consider in more detail below sets out proposals for an assessment methodology for determining whether a banking institution should be regarded as a globally systemically important bank ("G-SIB") and the additional capital requirements that G-SIBs should be subject to.

The second paper prepared by the FSB, which we will discuss in a separate alert, sets out proposals for a

framework for the resolution of failing institutions.


In finalising its new Basel III framework at the end of 2010, the BCBS mandated all banks to hold significantly more capital than is currently the case as well as introducing new leverage and liquidity ratios. The changes included increasing the minimum amount of common equity (principally ordinary shares and retained earnings) to be held by banks from 2% to 4.5% of risk weighted assets during a transitional period between 1 January 2013 and 1 January 2015, with total tier 1 capital rising from 4% of risk weighted assets to 6% during the same period. Banks will also be required to build up a capital conservation buffer to be comprised of common equity of up to 2.5% of risk weighted assets and may also be subject to additional counter cyclical buffers that can be imposed by local regulators.

The Basel III rules apply to all banks. In addition, the FSB and the BCBS have been considering additional rules to apply to the largest global banks to deal with concerns that such banks are regarded as too big to fail (meaning relevant governments would, as in the financial crisis, be prepared to use public funds to bail them out rather than face the systemic consequences of their failure). The FSB has previously outlined the moral hazard risks it believes arise from such institutions being regarded as too big to fail4 and mandated the BCBS to develop a methodology to assess the systemic importance of G-SIBs and additional measures that should be put in place to enhance their ability to absorb losses. This work was endorsed by the G-20 group of nations at their meeting in Seoul in November 2010. The BCBS paper referred to above sets out its proposals in this regard and, following the end of the consultation process, the BCBS is expected to present its final proposals to the next G-20 meeting in Cannes in November 2011.

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