Clayton Utz Insights

22 December 2011

Basel issues final rules for global systemically important banks

By Louise McCoach and Alex Chernishev.

Key Points:

The G-SIB capital requirements apply from 1 January 2016 and are in addition to the Basel III capital conservation and countercyclical buffers.

On 4 November 2011, the Basel Committee on Banking Supervision issued its framework for global systemically important banks (G-SIBs). The framework covers the assessment methodology for G-SIBs, the magnitude of additional loss absorbency that G-SIBs should have and the arrangements by which the framework will be phased in.

Importantly, some of the framework requirements will be subject to additional testing by March 2012 via updated bank data.

G-SIB framework

The framework assessment methodology is founded on an indicator-based approach and comprises five broad categories used to determine a banks systemic importance: size, interconnectedness, lack of readily available substitutes or financial institution infrastructure, global (cross-jurisdictional) activity and complexity. The methodology gives an equal weight of 20% to each of the five categories listed.

Interestingly, the framework rules also provide for the introduction of a "supervisory judgment" overlay, which can be used to support the results from the indicator-based measurement approach, or in exceptional circumstances to override the indicator-based measurement of G-SIBs. This judgment is, however, subject to international peer review to ensure consistency in its application. Where this judgment is resorted to it is intended to supplement the qualitative information in relation to a G-SIB for any particular indicator category.

Capital requirements

According to the framework rules, a G-SIB will, depending on the results of the assessment methodology outlined above, fall into one of four "buckets" requiring them to hold an additional 1%, 1.5%, 2.0% or 2.5% of Common Equity Tier 1 (CET1). CET1 represents the highest quality capital a bank can hold and comprises common equity and retained earnings.

The Basel Committee has also indicated that as a means of discouraging G-SIBs from becoming even more systemically important it is open to including an additional 3.5% CET1 bucket. The rules text note that these levels of additional loss absorbency are set at a minimum and therefore national jurisdictions may impose higher requirements on their banks, should they wish to do so.

Introduction of capital requirements

The G-SIB capital requirements apply from 1 January 2016 and are in addition to the Basel III capital conservation and countercyclical buffers. The assessment methodology for G-SIBs will be reviewed every three years to ensure it captures developments in the banking sector and any progress in methods and approaches for measuring systemic importance.

The Basel Committee is of the view that the number of G-SIBs will initially be 29 but it is believed that this number will change over time as banks adapt their behaviour in response to the G-SIB framework. It is not expected that any Australian banks will be among the initial 29 G-SIBs.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Louise McCoach
Louise McCoach