EBA Proposes Methodology to Calibrate O-SII Buffer Rates
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.
Keywords: Europe, EU, Banking, O-SII, CRD5, Systemic Risk, Regulatory Capital, Basel, Macro-Prudential Policy, Capital Buffer, EBA
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
ISSB Standards May Become Effective from January 2024
The International Organization of Securities Commissions (IOSCO) welcomed the confirmation statement by the International Sustainability Standards Board (ISSB) setting out its progress in the development of its first sustainability-related corporate disclosure standards.