The so-called domestic systematically important banks (D-SIB) might have to maintain a higher amount of capital to increase their capacity to absorb losses. It would also reduce probability of failure, said a panel set up by Bank for International Settlements (BIS).
According to a consultative document prepared by the BIS panel, the higher provisions for loss absorption should be met fully from common equity Tier-I. It is the simplest and most effective way to increase loss absorption capacity of a bank.
It is left to the banking regulator to identify the country’s systematically important banks and prescribe norms for them.
Other national regulators could prescribe additional norms to deal with risks posed by such entities, the BIS panel said.
Regulators will establish a D-SIB framework by 2016.
There are many banks that are not significant from an international perspective but could have important effect on the domestic financial system and the economy. In maximising their private benefits, such banks might choose strategies that do not take account of adverse side-effects, often termed “negative externalities”.
The impact of a D-SIB’s failure on the domestic economy should be assessed on factors like size, interconnectedness and complexity.
The requirement (for higher loss absorption) prescribed to a bank should be commensurate with the degree of systemic importance.
Keeping in mind variations across financial systems, the panel suggested a principles-based approach for D-SIB, with/or appropriate degree of discretion for national regulators. This contrasts with the prescriptive approach on global systematically important banks.