Methodology for the Identification of Other Systemically Important Institutions and the Related Capital Buffer Calibration

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The MFSA and the Central Bank of Malta publish a Consultation Document on the methodology for the identification of other systemically important institutions and the related capital buffer calibration.

This consultation paper provides a draft framework for the operationalisation of the Other Systemically Important Institution (O-SII) capital buffer, intended to mitigate the vulnerability of the domestic financial system and the real economy to the failure of systemically important institutions by increasing the loss absorbing capacity of domestically significant institutions.

The O-SII framework outlined in the consultation document applies to all entities subject to the CRDIV/CRR on a consolidated basis. O-SIIs are identified in line with a methodology based on the following criteria: Size, Substitutability, Cross-border Activity, and Resident Interconnectedness (‘Step 1’).

The weight of each criterion is 20%, 40%, 20% and 20% respectively. In order to limit subjectivity in interpreting results, a z-score model is being used.

Institutions that do not qualify under Step 1 will be assessed using the following two criteria: Size ≧25% of GDP; and Covered Deposits ≧2.5 times the domestic Depositor Compensation Scheme (DCS) funding (‘Step 2’). Institutions that meet both criteria will qualify as O-SIIs.

A bucketing methodology based on the scores achieved in Step 1 is being proposed. Buffer rates are divided into three buckets in steps of 0.5%, from 1% to 2%. The criterion for each bucket is as follows:

  • Some risk due to some criteria and/or Score equal to or above 1, and below 1.25: 1% buffer rate
  • Risk due to most of the criteria and/or Score equal to or above 1.25, and below 1.75: 1.5% buffer rate
  • High risk due to most of the criteria and/or Score equal to or above 1.75: 2% buffer rate.

O-SIIs that qualify via Step 2 will have a capital buffer rate of 0.5%.

The authorities are granting a transitory period of four years for the build-up of the O-SII buffer because certain provisions could have an impact on a credit institution’s capital planning measures.