The recent financial crisis has exposed, with particular prominence, the reality that systemically important institutions can present negative externalities to the broader financial system. In its 2014, ‘Guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of other systemically important institutions (O-SIIs)’, the European Banking Authority acknowledged that these negative externalities may – primarily – be mitigated by identifying the institutions that are systemically significant, and imposing stricter requirements thereon.
Last week, the Malta Financial Services Authority (“MFSA”) and the Central Bank of Malta (“CBM”) launched a consultation paper on the methodology to be implemented for the identification of Other Systemically Important Institutions (“O-SIIs”) and the calibration of the related capital buffer, under article 131 of Directive 2013/36/EU (the Capital Requirements Directive) (“CRD IV”). Indeed, the O-SIIs buffer focuses on reducing an institution’s probability of default, while the identification criteria analyse the impact that a failure of the institution would have on the financial system. It is noteworthy, moreover, that in line with the CRD IV, the proposals at hand apply to credit institutions, investment firms, and parent financial (or mixed financial) holding companies within the domestic financial sector at their highest level of consolidation in Malta (the “Institutions”).
The Proposed Framework: An Outline
The consultation paper puts forward two steps in the implementation of an O-SIIs buffer: (i) the identification of Institutions as O-SIIs; and (ii) the calibration of the buffer rate which will be applied to identified O-SIIs. Firstly, systemically important Institutions are to be identified and assessed on the basis of their relative importance within the sector based on the following criteria: (i) size; (ii) substitutability; (iii) cross-border activity; and (iv) resident interconnectedness. The greater the score, the more important the institution is.
Moreover, the identification methodology involves a second step, whereby authorities assess whether further institutions should be designated as O-SIIs based on additional, absolute indicators. In both steps, indicators were selected such that they adequately capture systemic risk domestically. The consultation paper further explains that the capital buffer calibration methodology relies on the resultant O-SII scores. Based on these scores, O-SIIs are allocated to different buckets attracting different buffer rates. The O-SIIs with the highest scores are allocated to the higher buckets while the O-SIIs with the lowest scores are allocated to the lower buckets, subject to pre-determined thresholds and criteria. The O-SIIs buffer shall be reviewed annually.
Interested stakeholders are being invited to provide feedback to the consultation paper by not later than noon of 18 November 2015. Following this consultation period, the identification and capital buffer requirements will come into force on 1 January 2016.
The above constitutes a general overview. For further details, please access the Consultation Paper on the MFSA website at: http://www.mfsa.com.mt/pages/announcement.aspx?id=7232.