Basel Committee

on Banking Supervision

A framework for dealing

with domestic systemically
important banks

October 2012
This publication is available on the BIS website (www.bis.org).

Bank for International Settlements 2012. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is cited.

ISBN 92-9131-141-3 (print)

ISBN 92-9197-141-3 (online)
 Contents

I. Introduction ................................................................................................................... 1
II. The principles ............................................................................................................... 2
A. Assessment methodology .................................................................................... 4
B. Higher loss absorbency ....................................................................................... 7

A framework for dealing with domestic systemically important banks

 A framework for dealing with
domestic systemically important banks

I. Introduction
1. The Basel Committee on Banking Supervision (the Committee)1 issued the rules text
on the assessment methodology for global systemically important banks (G-SIBs) and their
additional loss absorbency requirements in November 2011. 2 The G-SIB rules text was
endorsed by the G20 Leaders at their November 2011 meeting. The G20 Leaders also asked
the Committee and the Financial Stability Board to work on modalities to extend
expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs).3

2. The rationale for adopting additional policy measures for G-SIBs was based on the
negative externalities (ie adverse side effects) created by systemically important banks
which current regulatory policies do not fully address. In maximising their private benefits,
individual financial institutions may rationally choose outcomes that, from a system-wide
level, are sub-optimal because they do not take into account these externalities. These
negative externalities include the impact of the failure or impairment of large, interconnected
global financial institutions that can send shocks through the financial system which, in turn,
can harm the real economy. Moreover, the moral hazard costs associated with direct support
and implicit government guarantees may amplify risk-taking, reduce market discipline, create
competitive distortions, and further increase the probability of distress in the future. As a
result, the costs associated with moral hazard add to any direct costs of support that may be
borne by taxpayers.

3. The additional requirement applied to G-SIBs, which applies over and above the
Basel III requirements that are being introduced for all internationally-active banks, is
intended to limit these cross-border negative externalities on the global financial system and
economy associated with the most globally systemic banking institutions. But similar
externalities can apply at a domestic level. There are many banks that are not significant
from an international perspective, but nevertheless could have an important impact on their
domestic financial system and economy compared to non-systemic institutions. Some of
these banks may have cross-border externalities, even if the effects are not global in nature.
Similar to the case of G-SIBs, it was considered appropriate to review ways to address the
externalities posed by D-SIBs.

4. A D-SIB framework is best understood as taking the complementary perspective to

the G-SIB regime by focusing on the impact that the distress or failure of banks (including by
international banks) will have on the domestic economy. As such, it is based on the

1
The Basel Committee on Banking Supervision consists of senior representatives of bank supervisory
authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany,
Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi
Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United
States. It usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its
permanent Secretariat is located.
2
See Basel Committee, Global systemically important banks: assessment methodology and the additional loss
absorbency requirement (November 2011) at http://www.bis.org/publ/bcbs207.htm.
3
See Cannes Summit Final Declaration Building Our Common Future: Renewed Collective Action for the
Benefit of All, 4 November 2011.

A framework for dealing with domestic systemically important banks 1

assessment conducted by the local authorities, who are best placed to evaluate the impact of
failure on the local financial system and the local economy.

5. This point has two implications. The first is that in order to accommodate the
structural characteristics of individual jurisdictions, the assessment and application of policy
tools should allow for an appropriate degree of national discretion. This contrasts with the
prescriptive approach in the G-SIB framework. The second implication is that because a
D-SIB framework is still relevant for reducing cross-border externalities due to spillovers at
regional or bilateral level, the effectiveness of local authorities in addressing risks posed by
individual banks is of interest to a wider group of countries. A framework, therefore, should
establish a minimum set of principles, which ensures that it is complementary with the G-SIB
framework, addresses adequately cross-border externalities and promotes a level-playing
field.

6. The principles developed by the Committee for D-SIBs would allow for appropriate
national discretion to accommodate structural characteristics of the domestic financial
system, including the possibility for countries to go beyond the minimum D-SIB framework
and impose additional requirements based on the specific features of the country and its
domestic banking sector.

7. The principles set out in the document focus on the higher loss absorbency (HLA)
requirement for D-SIBs. The Committee would like to emphasise that other policy tools,
particularly more intensive supervision, can also play an important role in dealing with D-
SIBs.

8. The principles were developed to be applied to consolidated groups and

subsidiaries. However, national authorities may apply them to branches in their jurisdictions
in accordance with their legal and regulatory frameworks.4

9. The implementation of the principles will be combined with a strong peer review
process introduced by the Committee. The Committee intends to add the D-SIB framework to
the scope of the Basel III regulatory consistency assessment programme. 5 This will help
ensure that appropriate and effective frameworks for D-SIBs are in place across different
jurisdictions.

10. Given that the D-SIB framework complements the G-SIB framework, the Committee
considers that it would be appropriate if banks identified as D-SIBs by their national
authorities are required by those authorities to comply with the principles in line with the
phase-in arrangements for the G-SIB framework, ie from January 2016.

II. The principles

11. The Committee has developed a set of principles that constitutes the D-SIB
framework. The 12 principles can be broadly categorised into two groups: the first group

4
While the application to branches of the principles regarding the assessment of systemic importance should
not pose any specific problem, the range of policy responses that host authorities have available to deal with
systemic branches in their jurisdiction may be more limited.
5
See Basel Committee, Basel III regulatory consistency assessment programme (April 2012) at
http://www.bis.org/publ/bcbs216.htm.

2 A framework for dealing with domestic systemically important banks

(Principles 1 to 7) focuses mainly on the assessment methodology for D-SIBs while the
second group (Principles 8 to 12) focuses on HLA for D-SIBs.6

12. The 12 principles are set out below:

Assessment methodology
Principle 1: National authorities should establish a methodology for assessing the degree to
which banks are systemically important in a domestic context.

Principle 2: The assessment methodology for a D-SIB should reflect the potential impact of,
or externality imposed by, a banks failure.

Principle 3: The reference system for assessing the impact of failure of a D-SIB should be
the domestic economy.

Principle 4: Home authorities should assess banks for their degree of systemic importance
at the consolidated group level, while host authorities should assess subsidiaries in their
jurisdictions, consolidated to include any of their own downstream subsidiaries, for their
degree of systemic importance.

Principle 5: The impact of a D-SIBs failure on the domestic economy should, in principle, be
assessed having regard to bank-specific factors:
(a) Size;
(b) Interconnectedness;
(c) Substitutability/financial institution infrastructure (including considerations related to
the concentrated nature of the banking sector); and
(d) Complexity (including the additional complexities from cross-border activity).
In addition, national authorities can consider other measures/data that would inform these
bank-specific indicators within each of the above factors, such as size of the domestic
economy.
Principle 6: National authorities should undertake regular assessments of the systemic
importance of the banks in their jurisdictions to ensure that their assessment reflects the
current state of the relevant financial systems and that the interval between D-SIB
assessments not be significantly longer than the G-SIB assessment frequency.

Principle 7: National authorities should publicly disclose information that provides an outline
of the methodology employed to assess the systemic importance of banks in their domestic
economy.

Higher loss absorbency

Principle 8: National authorities should document the methodologies and considerations
used to calibrate the level of HLA that the framework would require for D-SIBs in their
jurisdiction. The level of HLA calibrated for D-SIBs should be informed by quantitative

6
HLA refers to higher loss absorbency relative to the Basel III requirements for internationally active banks. For
domestic banks that are not internationally active, HLA is relative to requirements for domestic banks.

A framework for dealing with domestic systemically important banks 3

methodologies (where available) and country-specific factors without prejudice to the use of
supervisory judgement.

Principle 9: The HLA requirement imposed on a bank should be commensurate with the
degree of systemic importance, as identified under Principle 5.

Principle 10: National authorities should ensure that the application of the G-SIB and D-SIB
frameworks is compatible within their jurisdictions. Home authorities should impose HLA
requirements that they calibrate at the parent and/or consolidated level, and host authorities
should impose HLA requirements that they calibrate at the sub-consolidated/subsidiary level.
The home authority should test that the parent bank is adequately capitalised on a stand-
alone basis, including cases in which a D-SIB HLA requirement is applied at the subsidiary
level. Home authorities should impose the higher of either the D-SIB or G-SIB HLA
requirements in the case where the banking group has been identified as a D-SIB in the
home jurisdiction as well as a G-SIB.

Principle 11: In cases where the subsidiary of a bank is considered to be a D-SIB by a host
authority, home and host authorities should make arrangements to coordinate and cooperate
on the appropriate HLA requirement, within the constraints imposed by relevant laws in the
host jurisdiction.

Principle 12: The HLA requirement should be met fully by Common Equity Tier 1 (CET1). In
addition, national authorities should put in place any additional requirements and other policy
measures they consider to be appropriate to address the risks posed by a D-SIB.

A. Assessment methodology
Principle 1: National authorities should establish a methodology for assessing the
degree to which banks are systemically important in a domestic context.

Principle 2: The assessment methodology for a D-SIB should reflect the potential
impact of, or externality imposed by, a banks failure.

13. A starting point for the development of principles for the assessment of D-SIBs is a
requirement that all national authorities should undertake an assessment of the degree to
which banks are systemically important in a domestic context. The rationale for focusing on
the domestic context is outlined in paragraph 17 below.

14. Paragraph 14 of the G-SIB rules text states that global systemic importance should
be measured in terms of the impact that a failure of a bank can have on the global financial
system and wider economy rather than the risk that a failure can occur. This can be thought
of as a global, system-wide, loss-given-default (LGD) concept rather than a probability of
default (PD) concept. Consistent with the G-SIB methodology, the Committee is of the view
that D-SIBs should also be assessed in terms of the potential impact of their failure on the
relevant reference system. One implication of this is that to the extent that D-SIB indicators
are included in any methodology, they should primarily relate to impact of failure measures
and not risk of failure measures.

Principle 3: The reference system for assessing the impact of failure of a D-SIB should
be the domestic economy.

Principle 4: Home authorities should assess banks for their degree of systemic
importance at the consolidated group level, while host authorities should assess

4 A framework for dealing with domestic systemically important banks

subsidiaries in their jurisdictions, consolidated to include any of their own
downstream subsidiaries, for their degree of systemic importance.

15. Two key aspects that shape the D-SIB framework and define its relationship to the
G-SIB framework relate to how it deals with two conceptual issues with important practical
implications:
what is the reference system for the assessment of systemic impact; and
what is the appropriate unit of analysis (ie the entity which is being assessed)?

16. For the G-SIB framework, the appropriate reference system is the global economy,
given the focus on cross-border spillovers and the negative global externalities that arise
from the failure of a globally active bank. As such this allowed for an assessment of the
banks that are systemically important in a global context. The unit of analysis was naturally
set at the globally consolidated level of a banking group (paragraph 89 of the G-SIB rules
text states that (t)he assessment of the systemic importance of G-SIBs is made using data
that relate to the consolidated group).

17. Correspondingly, a process for assessing systemic importance in a domestic

context should focus on addressing the externalities that a banks failure generates at a
domestic level. Thus, the Committee is of the view that the appropriate reference system
should be the domestic economy, ie that banks would be assessed by the national
authorities for their systemic importance to that specific jurisdiction. The outcome would be
an assessment of banks active in the domestic economy in terms of their systemic
importance.

18. In terms of the unit of analysis, the Committee is of the view that home authorities
should consider banks from a (globally) consolidated perspective. This is because the
activities of a bank outside the home jurisdiction can, when the bank fails, have potential
significant spillovers to the domestic (home) economy. Jurisdictions that are home to banking
groups that engage in cross-border activity could be impacted by the failure of the whole
banking group and not just the part of the group that undertakes domestic activity in the
home economy. This is particularly important given the possibility that the home government
may have to fund/resolve the foreign operations in the absence of relevant cross-border
agreements. This is in line with the concept of the G-SIB framework.

19. When it comes to the host authorities, the Committee is of the view that they should
assess foreign subsidiaries in their jurisdictions, also consolidated to include any of their own
downstream subsidiaries, some of which may be in other jurisdictions. For example, for a
cross-border financial group headquartered in country X, the authorities in country Y would
only consider subsidiaries of the group in country Y plus the downstream subsidiaries, some
of which may be in country Z, and their impact on the economy Y. Thus, subsidiaries of
foreign banking groups would be considered from a local or sub-consolidated basis from the
level starting in country Y. The scope should be based on regulatory consolidation as in the
case of the G-SIB framework. Therefore, for the purposes of assessing D-SIBs, insurance or
other non-banking activities should only be included insofar as they are included in the
regulatory consolidation.

20. The assessment of foreign subsidiaries at the local consolidated level also
acknowledges the fact that the failure of global banking groups could impose outsized
externalities at the local (host) level when these subsidiaries are significant elements in the
local (host) banking system. This is important since there exist several jurisdictions that are
dominated by foreign subsidiaries of internationally active banking groups.

A framework for dealing with domestic systemically important banks 5

Principle 5: The impact of a D-SIBs failure on the domestic economy should, in
principle, be assessed having regard to bank-specific factors:
(a) Size;
(b) Interconnectedness;
(c) Substitutability/financial institution infrastructure (including considerations
related to the concentrated nature of the banking sector); and
(d) Complexity (including the additional complexities from cross-border activity).
In addition, national authorities can consider other measures/data that would inform
these bank-specific indicators within each of the above factors, such as size of the
domestic economy.

21. The G-SIB methodology identifies five broad categories of factors that influence
global systemic importance: size, cross-jurisdictional activity, interconnectedness,
substitutability/financial institution infrastructure and complexity. The indicator-based
approach and weighting system in the G-SIB methodology was developed to ensure a
consistent international ranking of G-SIBs. The Committee is of the view that this degree of
detail is not warranted for D-SIBs, given the focus is on the domestic impact of failure of a
bank and the wide ranging differences in each jurisdictions financial structure hinder such
international comparisons being made. This is one of the reasons why the D-SIB framework
has been developed as a principles-based approach.

22. Consistent with this view, it is appropriate to list, at a high level, the broad category
of factors (eg size) that jurisdictions should have regard to in assessing the impact of a
D-SIBs failure. Among the five categories in the G-SIB framework, size, interconnectedness,
substitutability/financial institution infrastructure and complexity are all relevant for D-SIBs as
well. Cross-jurisdictional activity, the remaining category, may not be as directly relevant,
since it measures the degree of global (cross-jurisdictional) activity of a bank which is not the
focus of the D-SIB framework.

23. In addition, national authorities may choose to also include some country-specific
factors. A good example is the size of a bank relative to domestic GDP. If the size of a bank
is relatively large compared to the domestic GDP, it would make sense for the national
authority of the jurisdiction to identify it as a D-SIB whereas a same-sized bank in another
jurisdiction, which is smaller relative to the GDP of that jurisdiction, may not be identified as a
D-SIB.

24. National authorities should have national discretion as to the appropriate relative
weights they place on these factors depending on national circumstances.

Principle 6: National authorities should undertake regular assessments of the

systemic importance of the banks in their jurisdictions to ensure that their
assessment reflects the current state of the relevant financial systems and that the
interval between D-SIB assessments not be significantly longer than the G-SIB
assessment frequency.
25. The list of G-SIBs (including their scores) is assessed annually, based on updated
data submitted by each participating bank, but measured against a global sample that is
largely unchanged for three years. It is expected that the names and buckets of G-SIBs and
the data used to produce the scores will be disclosed.

26. The Committee believes it is good practice for national authorities to undertake a
regular assessment as to the systemic importance of the banks in their financial systems.
The assessment should also be conducted if there are important structural changes to the

6 A framework for dealing with domestic systemically important banks

banking system such as, for example, a merger of major banks. A national authoritys
assessment process and methodology will be reviewed by the Committees implementation
monitoring process.

27. It is also desirable that the interval of the assessments not be significantly longer
than that for G-SIBs (ie one year). For example, a SIB could be identified as a G-SIB but also
a D-SIB in the same jurisdiction or in other host jurisdictions. Alternatively, a G-SIB could
drop from the G-SIB list and become/continue to be a D-SIB. In order to keep a consistent
approach in these cases, it would be sensible to have a similar frequency of assessments for
the two frameworks.

Principle 7: National authorities should publicly disclose information that provides an

outline of the methodology employed to assess the systemic importance of banks in
their domestic economy.

28. The assessment process used needs to be clearly articulated and made public so
as to set up the appropriate incentives for banks to seek to reduce the systemic risk they
pose to the reference system. This was the key aspect of the G-SIB framework where the
assessment methodology and the disclosure requirements of the Committee and the banks
were set out in the G-SIB rules text. By taking these measures, the Committee sought to
ensure that banks, regulators and market participants would be able to understand how the
actions of banks could affect their systemic importance score and thereby the required
magnitude of additional loss absorbency. The Committee believes that transparency of the
assessment process for the D-SIB framework is also important, even if it is likely to vary
across jurisdictions given differences in frameworks and policy tools used to address the
systemic importance of banks.

B. Higher loss absorbency

Principle 8: National authorities should document the methodologies and
considerations used to calibrate the level of HLA that the framework would require for
D-SIBs in their jurisdiction. The level of HLA calibrated for D-SIBs should be informed
by quantitative methodologies (where available) and country-specific factors without
prejudice to the use of supervisory judgement.

29. The purpose of an HLA requirement for D-SIBs is to reduce further the probability of
failure compared to non-systemic institutions, reflecting the greater impact a D-SIB failure is
expected to have on the domestic financial system and economy.

30. The Committee intends to assess the implementation of the framework by the home
and host authorities for its degree of cross-jurisdictional consistency, having regard to the
differences in national circumstances. In order to increase the consistency in the
implementation of the D-SIB framework and to avoid situations where banks similar in terms
of the level of domestic systemic importance they pose in the same or different jurisdictions
have substantially different D-SIB frameworks applied to them, it is important that there is
sufficient documentation provided by home and host authorities for the Committee to conduct
an effective implementation review assessment. It is important for the application of a D-SIB
HLA, at both the parent and subsidiary level, to be based on a transparent and well
articulated assessment framework to ensure the implications of the requirements are well
understood by both the home and the host authorities.

31. The level of HLA for D-SIBs should be subject to policy judgement by national
authorities. That said, there needs to be some form of analytical framework that would inform

A framework for dealing with domestic systemically important banks 7

policy judgements. This was the case for the policy judgement made by the Committee on
the level of the additional loss absorbency requirement for G-SIBs.7

32. The policy judgement on the level of HLA requirements should also be guided by
country-specific factors which could include the degree of concentration in the banking sector
or the size of the banking sector relative to GDP. Specifically, countries that have a larger
banking sector relative to GDP are more likely to suffer larger direct economic impacts of the
failure of a D-SIB than those with smaller banking sectors. While size-to-GDP is easy to
calculate, the concentration of the banking sector could also be considered (as a failure in a
medium-sized highly concentrated banking sector would likely create more of an impact on
the domestic economy than if it were to occur in a larger, more widely dispersed banking
sector).8

33. The use of these factors in calibrating the HLA requirement would provide
justification for different intensities of policy responses across countries for banks that are
otherwise similar across the four key bank-specific factors outlined in Principle 5.

Principle 9: The HLA requirement imposed on a bank should be commensurate with

the degree of systemic importance, as identified under Principle 5.

34. In the G-SIB framework, G-SIBs are grouped into different categories of systemic
importance based on the score produced by the indicator-based measurement approach.
Different additional loss absorbency requirements are applied to the different buckets (G-SIB
rules text paragraphs 52 and 73).

35. Although the D-SIB framework does not produce scores based on a prescribed
methodology as in the case of the G-SIB framework, the Committee is of the view that the
HLA requirements for D-SIBs should also be decided based on the degree of domestic
systemic importance. This is to provide the appropriate incentives to banks which are subject
to the HLA requirements to reduce (or at least not increase) their systemic importance over
time. In the case where there are multiple D-SIB buckets in a jurisdiction, this could imply
differentiated levels of HLA between D-SIB buckets.

Principle 10: National authorities should ensure that the application of the G-SIB and
D-SIB frameworks is compatible within their jurisdictions. Home authorities should
impose HLA requirements that they calibrate at the parent and/or consolidated level,
and host authorities should impose HLA requirements that they calibrate at the sub-
consolidated/subsidiary level. The home authority should test that the parent bank is
adequately capitalised on a stand-alone basis, including cases in which a D-SIB HLA
requirement is applied at the subsidiary level. Home authorities should impose the
higher of either the D-SIB or G-SIB HLA requirements in the case where the banking
group has been identified as a D-SIB in the home jurisdiction as well as a G-SIB.

36. National authorities, including host authorities, currently have the capacity to set and
impose capital requirements they consider appropriate to banks within their jurisdictions. The
G-SIB rules text states that host authorities of G-SIB subsidiaries may apply an additional
loss absorbency requirement at the individual legal entity or consolidated level within their

7
Annex 2 of the G-SIB rules text sets out the various empirical analysis conducted by the Committee, such as
the expected impact approach, that informed the policy judgement of the Committee.
8
Another factor that could be relevant is the funding position of the banking sector, whereby more foreign
wholesale funding could increase the transition costs (deleveraging) facing both the financial sector and the
domestic economy in the event of a crisis.

8 A framework for dealing with domestic systemically important banks

jurisdiction.9 The Committee has no intention to change this aspect of the status quo when
introducing the D-SIB framework. An imposition of a D-SIB HLA by a host authority is no
different (except for additional transparency) from their current capacity to impose a Pillar 1
or 2 capital charge. Therefore, the ability of the host authorities to implement a D-SIB HLA on
local subsidiaries does not raise any new home-host issues.

37. National authorities should ensure that banks with the same degree of systemic
importance in their jurisdiction, regardless of whether they are domestic banks, subsidiaries
of foreign banking groups, or subsidiaries of G-SIBs, are subject to the same HLA
requirements, ceteris paribus. Banks in a jurisdiction should be subject to a consistent,
coherent and non-discriminatory treatment regardless of the ownership. The objective of the
host authorities power to impose HLA on subsidiaries is to bolster capital to mitigate the
potential heightened impact of the subsidiaries failure on the domestic economy due to their
systemic nature. This should be maintained in cases where a bank might not be (or might be
less) systemic at home, but its subsidiary is (more) systemic in the host jurisdiction.

38. An action by the host authorities to impose a D-SIB HLA requirement leads to
increases in capital at the subsidiary level which can be viewed as a shift in capital from the
parent bank to the subsidiary, unless it already holds an adequate capital buffer in the host
jurisdiction or the additional capital raised by the subsidiary is from outside investors. This
could, in the case of substantial or large subsidiaries, materially decrease the level of capital
protecting the parent bank. Under such cases, it is important that the home authority
continues to ensure there are sufficient financial resources at the parent level, for example
through a solo capital requirement. Indeed, paragraph 23 of the Basel II rules text states
(f)urther, as one of the principal objectives of supervision is the protection of depositors, it is
essential to ensure that capital recognised in capital adequacy measures is readily available
for those depositors. Accordingly, supervisors should test that individual banks are
adequately capitalised on a stand-alone basis.

39. Within a jurisdiction, applying the D-SIB framework to both G-SIBs and non-G-SIBs
will help ensure a level playing field within the national context. For example, in a jurisdiction
with two banks that are roughly identical in terms of their assessed systemic nature at the
domestic level, but where one is a G-SIB and the other is not, national authorities would have
the capacity to apply the same D-SIB HLA requirement to both. In such cases, the home
authorities could face a situation where the HLA requirement on the consolidated group will
be the higher of those prescribed by the G-SIB and D-SIB frameworks (ie the higher of either
the D-SIB or G-SIB requirement).

40. This approach is also consistent with the Committees standards, which are minima
rather than maxima. It is also consistent with the G-SIB rules text that is explicit in stating that
home authorities can impose higher requirements than the G-SIB additional loss absorbency
requirement (G-SIB rules text paragraph 74).10

9
Paragraph 89 of the G-SIB rules text states the assessment of the systemic importance of G-SIBs is made
using data that relate to the consolidated group. To be consistent with this approach, the Basel Committee will
apply the additional loss absorbency requirement to the consolidated group. However, as with the minimum
requirement and the capital conservation and countercyclical buffers, application at the consolidated level
does not rule out the option for the host jurisdictions of subsidiaries of the group also to apply the requirement
at the individual legal entity or consolidated level within their jurisdiction.
10
Paragraph 74 states that the additional loss absorbency requirement set out above is the minimum level. If
national jurisdictions wish to impose a higher requirement to their banks, they are free to do so.

A framework for dealing with domestic systemically important banks 9

41. The Committee is of the view that any form of double-counting should be avoided
and that the HLA requirements derived from the G-SIB and D-SIB frameworks should not be
additive. This will ensure the overall consistency between the two frameworks and allows the
D-SIB framework to take the complementary perspective to the G-SIB framework.

Principle 11: In cases where the subsidiary of a bank is considered to be a D-SIB by a

host authority, home and host authorities should make arrangements to coordinate
and cooperate on the appropriate HLA requirement, within the constraints imposed by
relevant laws in the host jurisdiction.

42. The Committee recognises that there could be some concern that host authorities
tend not to have a group-wide perspective when applying HLA requirements to subsidiaries
of foreign banking groups in their jurisdiction. The home authorities, on the other hand,
clearly need to know D-SIB HLA requirements on significant subsidiaries since there could
be implications for the allocation of financial resources within the banking group.

43. In these circumstances, it is important that arrangements to coordinate and

cooperate on the appropriate HLA requirement between home and host authorities are
established and maintained, within the constraints imposed by relevant laws in the host
jurisdiction, when formulating HLA requirements. This is particularly important to make it
possible for the home authority to test the capital position of a parent on a stand-alone basis
as mentioned in paragraph 38 and to prevent a situation where the home authorities are
surprised by the action of the host authorities. Home and host authorities should coordinate
and cooperate with each other on any plan to impose an HLA requirement on a subsidiary
bank, and the amount of the requirement, before taking any action. The host authority should
provide a rationale for their decision, and an indication of the steps the bank would need to
take to avoid/reduce such a requirement. The home and host authorities should also discuss
(i) the resolution regimes (including recovery and resolution plans) in both jurisdictions, (ii)
available resolution strategies and any specific resolution plan in place for the firm, and (iii)
the extent to which such arrangements should influence HLA requirements.

Principle 12: The HLA requirement should be met fully by Common Equity Tier 1
(CET1). In addition, national authorities should put in place any additional
requirements and other policy measures they consider to be appropriate to address
the risks posed by a D-SIB.

44. The additional loss absorbency requirement for G-SIBs is to be met by CET1, as
stated in the G-SIBs rules text (paragraph 87). The Committee considered the use of CET1
to be the simplest and most effective way to increase the going concern loss-absorbing
capacity of a bank. HLA requirements for D-SIBs should also be fully met with CET1 to
ensure a maximum degree of consistency in terms of effective loss absorbing capacity. This
has the benefit of facilitating direct and transparent comparability of the application of
requirements across jurisdictions, an element that is considered desirable given the fact that
most of these banks will have cross-border operations being in direct competition with each
other. In addition, national authorities should put in place any additional requirements and
other policy measures they consider to be appropriate to address the risks posed by a D-SIB.

45. National authorities should implement the HLA requirement through an extension of
the capital conservation buffer, maintaining the division of the buffer into four bands of equal
size (as described in paragraph 147 of the Basel III rules text). This is in line with the
treatment of the additional loss absorbency requirement for G-SIBs. The HLA requirement for
D-SIBs is essentially a requirement that sits on top of the capital buffers and minimum capital
requirement, with a pre-determined set of consequences for banks that do not meet this
requirement.

10 A framework for dealing with domestic systemically important banks

46. In some jurisdictions, it is possible that Pillar 2 may need to adapt to accommodate
the existence of the HLA requirements for D-SIBs. Specifically, it would make sense for
authorities to ensure that a banks Pillar 2 requirements do not require capital to be held
twice for issues that relate to the externalities associated with distress or failure of D-SIBs if
they are captured by the HLA requirement. However, Pillar 2 will normally capture other risks
that are not directly related to these externalities of D-SIBs (eg interest rate and
concentration risks) and so capital meeting the HLA requirement should not be permitted to
be simultaneously used to meet Pillar 2 requirement that relate to these other risks.

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