Global systemically important banks: Assessment methodology and the additional loss absorbency requirement

This consultative document sets out the proposal from the Basel Committee on the assessment methodology for global systemic importance, the magnitude of additional loss absorbency that global systemically important banks should have, and the arrangements by which they will be phased in. The work of the Basel Committee forms part of a broader effort by the Financial Stability Board to reduce the moral hazard of global systemically important institutions.

The rationale for the policy measures set out in the document is to deal with the cross-border negative externalities created by global systemically important banks which current regulatory policies do not fully address. The measures will enhance the going-concern loss absorbency of global systemically important banks and reduce the probability of their failure.

The assessment methodology for global systemically important banks is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% loss absorbency would be applied in such circumstances.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.

The Basel Committee welcomes comments on this consultative document. Comments should be submitted by Friday, 26 August 2011 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements' website unless a commenter specifically requests confidential treatment.