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.
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:
1 January 2015
14 January 2015
21 January 2015
30 January 2015
“Second Half of 2015”
1 January 2016
1 January 2017
RTS comes into effect
EBA to determine initial sample of 75 largest EU and non-EU banks
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
Based on indicator values provided by national authorities, EBA to compute denominators for the year 2014
National authorities to identify G-SIIs based on 2014 score
G-SII 2014 scores to be updated
Higher own funds requirement to apply to those firms identified as G-SIIs in “Early 2015”
Higher own funds requirement to apply based on updated scoring conducted in “Second Half of 2015”
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Michael Beaton is a lawyer and managing partner of Derivatives Risk Solutions LLP.