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    EBA Proposes Methodology to Calibrate O-SII Buffer Rates

    December 22, 2020

    EBA proposed the implementation of an EU-wide floor methodology for calibration of other systemically important institution (O-SII) buffer rates. The proposed methodology included in the report aims to strengthen the stability of the banking sector and avoid the under-calibration of O-SII capital buffer rates, while allowing the relevant authorities to consider national banking-sector specificities. The proposed methodology will inform the EC legislative initiatives that could shape the introduction of such an EU-wide floor. In this report, EBA recommends introduction of the EU‐wide floor methodology in the EU framework, ideally by 2022.

    Pursuing the mandate of updated Capital Requirements Directive (CRD5) for EBA to report to EC on the appropriate methodology for the design and calibration of O‐SII buffer rates, the report proposes a floor methodology to be implemented in EU. The methodology is proposed not with the aim of advising national authorities to set their O‐SII buffer rates specifically at this floor, but rather to use it as a fundamental principle and lower bound for their final buffer rate decisions. The introduction of this EU‐wide floor methodology would provide an important safeguard against potential under‐calibration of the O‐SII buffers, thus promoting financial stability across EU. In the context of withstanding future shocks caused by the aftermath of the pandemic crisis, this floor methodology would strengthen the prospects of ensuring a minimum level playing field across systemically important institutions in EU. EBA also published a user-friendly data visualization tool that will allow stakeholders to better understand and navigate the charts, tables, and most of the country-level data contributing to the findings and conclusions included in the report.

    EU co‐legislators could issue a legal mandate for EBA to cover both the identification process (currently framed by EBA guidelines) and the buffer calibration process. As explained in the report, the floor methodology should, thus, be based on O‐SII scores resulting from the first stage of the identification process, for consistency and comparability reasons. Notwithstanding any substantial review of the macro-prudential toolkit in EU, this single mandate would undoubtedly contribute to fostering increasing harmonization of macro-prudential supervisory practices in EU with regard to this structural capital buffer of an idiosyncratic nature, which is naturally less prone to changes over the course of the economic cycle or short‐term fluctuations. Should the mandate to EBA require EBA to draft technical standards on the appropriate methodology to calibrate O‐SII buffer rates, it would seem unbalanced to keep the O‐SII identification process framed by EBA guidelines.

    With the proposed floor methodology, all EU institutions identified as O-SIIs will be assigned a non-zero percent buffer rate. National authorities will still retain the ability to set higher O-SII buffer rates than the prescribed floor and are encouraged to do so where deemed appropriate. At present, no harmonized methodology exists at the EU level to calibrate O-SII buffer rates. Therefore, the recommendations included in the report do not bear immediate consequences for the banking sector in EU and should be seen as a preparatory step to inform EU co-legislators in view of legislative initiatives to design and operationalize an EU-wide methodology for the calibration of O-SII buffer rates. Once the floor is implemented, EBA suggests a first reassessment of this floor methodology after two years of implementation. An earlier assessment of the floor methodology might be undertaken given exceptional circumstances.

     

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    Keywords: Europe, EU, Banking, O-SII, CRD5, Systemic Risk, Regulatory Capital, Basel, Macro-Prudential Policy, Capital Buffer, EBA

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