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EBA Publishes RTS on G-SII Identification Methodology

On 5 June 2014 the European Banking Authority (EBA) published final draft Regulatory Technical Standards (RTS) on the methodology for the identification of global systemically important institutions (G-SIIs) under the Capital Requirements Directive.  Also published on the same day were final draft Implementing Technical Standards (ITS) regarding the public disclosure of the values used in G-SII identification in accordance with the Capital Requirements Regulation, and accompanying Guidelines designed to ensure the consistent application of the ITS.

The Capital Requirements Directive imposes higher own funds requirements on G-SIIs – in the form of a G-SII buffer comprised of additional Tier 1 Common Equity – in order to compensate for the higher risk that they represent to the financial system and the potential impact of their failure on taxpayers.  G-SII status is calculated annually by authorities in each Member State.  Calculations are based on an average score for a firm calculated with respect to five equally-weighted categories broken down into 12 indicators, as set out in the table below.  The indicators are designed to measure the systemic significant of a firm and reflect the potential negative impact of its failure as well as the critical functions it performs.

Category Indicator
Size
  • Total group exposure[1]
Interconnectedness
  • Intra financial system assets
  • Intra financial system liabilities
  • Securities outstanding
Substitutability
  • Assets under custody
  • Payment activity
  • Underwritten transactions in debt and equity markets
Complexity
  • Notional amount of OTC derivatives
  • Level 3 (i.e. illiquid) assets
  • Trading and available-for-sale securities
Cross border activity
  • Cross jurisdictional claims
  • Cross jurisdictional liabilities

 

The systemic importance of a firm is determined by reference to the proportion its G-SII score represents to the aggregate score taken from a sample of the 75 largest EU and non-EU banks.  Depending on the score, firms are allocated to specific ‘G-SII buckets’ each of which carries a different percentage level in terms of G-SII buffer.  The relevant sample is to be identified by 31 July of each year and the score of each firm is to be calculated by 15 December each year.  The identification of a relevant entity as a G-SII and the allocation to a particular bucket it to take effect as of 1 January in the second year following determination of the score so that G-SIIs have time to adjust their own funds to the buffer requirement.

In addition, Member States’ authorities have the right to exercise supervisory judgment and designate a bank as a G-SII or re-allocate it to a different bucket depending on an assessment of whether its failure would have a greater or lesser negative impact on global financial markets and the global economy (but not based on the probability that it will fail).

The timetable of events is set out below:

Date Event
1 January 2015 RTS comes into effect
14 January 2015 EBA to determine initial sample of 75 largest EU and non-EU banks
21 January 2015 National authorities to report indicator values to the EBA based on data for financial year-ends prior to July 2014 for entities in the initial sample
30 January 2015 Based on indicator values provided by national authorities, EBA to compute denominators for the year 2014
“Early 2015” National authorities to identify G-SIIs based on 2014 score
“Second Half of 2015” G-SII 2014 scores to be updated
1 January 2016 Higher own funds requirement to apply to those firms identified as G-SIIs in “Early 2015”
1 January 2017 Higher own funds requirement to apply based on updated scoring conducted in “Second Half of 2015”

 

 

[1]  Being the aggregate of total on-balance sheet items and of total derivative and off-balance sheet items, calculated on consolidated basis, less regulatory adjustments.  Note that physical or financial collateral, guarantees or purchased credit protection does not reduce on-balance sheet exposures.

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