On June 29, the Basel Committee on Banking Supervision (BCBS) released a consultative document, “A framework for dealing with domestic systemically important banks”, which responds to the G20 mandate, established at the Cannes 2011 Summit, requiring extension of the framework for Global Systemically Important Banks (G-SIBS) to Domestic SIBs.

The IIF response, submitted on August the 1, was produced by the Working Group on Capital Adequacy, under the aegis of the IIF Special Committee on Regulatory Capital (SCRC), and with input from the EMAC Working Group on Regulatory Reform, and the Latin America, Middle East North Africa and Asia-Pacific CRO Fora.

The BCBS framework on D-SIBs lists a set of 12 principles which are categorized in two groups: an assessment methodology for Domestic SIBs and higher loss absorbency (HLA) requirements for D-SIBs. The reference system for assessing the whether a bank would be “systemically important” will be the domestic economy and take into account a bank’s size, interconnectedness, substitutability and complexity. National Authorities can also consider other measures (such as size of a bank relative to domestic GDP and degree of concentration in the banking sector).

The IIF’s letter reiterated the view taken with respect to the earlier G-SIB standards that additional requirements for banks deemed to be systemically relevant are ill-advised, especially at a time when there are many challenges to economic recovery; however, detailed comments are also given on the assumption that the G20 and Basel Committee would persist in determination to impose G-SIB and D-SIB requirements. The IIF agreed with the BCBS that the proposed framework should take a principles-based approach, in contrast to the prescriptive approach of the G-SIB framework. Nevertheless, though recognizing that national authorities should retain a degree of discretion in assessing any D-SIB capital surcharge, the Institute constrained discretion to assure a degree of broad consistency across jurisdictions, so that, for example, any D-SIB surcharge should not be higher than G-SIB maximum.

The Institute also recommended that the Basel Committee should consider establishing a framework to ensure effective cooperation and resolve potential conflicts arising from unilateral measures by individual authorities. Furthermore, the D-SIB assessment, and any potential surcharge, should be calibrated taking into account other existing frameworks, especially Pillar 2 but also domestic requirements.