Defining Global Systemically Important Banks and Additional Loss Absorbency Requirements

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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.

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Morrison & Foerster LLP on:

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