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Additional capital requirement for domestic systemically important banks

by William Arnold | Oct 24, 2012

On 11 October, the Basel Committee on Banking Regulation published its final framework on domestic systemically important banks (D-SIBs). The Committee recommends that starting in 2016 national regulators require institutions whose failure would pose systemic risks in their jurisdiction to hold more core equity Tier 1 capital than the minimum required in the forthcoming Basel III framework.  This is credit positive for D-SIB creditors however the details and additional capital requirements remain unspecified.

Additional capital for D-SIBs is intended to reduce the risk of a failure of these banks and the therefore the broader systemic consequences, including the cost to taxpayers from a government bailout. Moody’s believe the additional capital will be staggered between 0% and 2.5% (3.5% for banks that grow too fast) on top of Basel III, depending on a bank’s systemic relevance.

The Committee proposes that national regulators classify D-SIBs in their jurisdictions and define additional capital requirements for them. Regulators will have to publish the list of D-SIBs in their jurisdictions along with specific capital requirements for those institutions, and their underlying methodology. Regulators therefore will be under pressure to implement adequate requirements by allowing investors to enforce market discipline by penalising banks in regulatory regimes deemed less strict.