DS-1 DS-1 Recovery and Resolution Planning
DS-1.1 DS-1.1 Overview
DS-1.1.1
The objective of the D-SIBs framework is to identify banks that could cause significant disruption to the domestic financial system and economic activity locally in the event of distress or failure. To address the negative externalities posed by such banks, regulatory and supervisory measures will be undertaken with the aim of:
(a) Reducing the probability of failure of D-SIBs, by increasing their going-concern loss absorbency through additional capital requirements, requiring early recovery planning and increasing the intensity of their supervision; and(b) Reducing the extent or impact of any failure, by improving the resolvability of these banks.July 2018DS-1.2 DS-1.2 General Requirements
DS-1.2.1
Bahraini conventional bank licensees designated as D-SIBs must hold designated HLA expressed as Common Equity Tier 1 ('CET1') capital at 1.5 percent of the total Risk-Weighted Assets ('RWA'), as calculated for the purposes of capital adequacy.July 2018DS-1.2.2
The HLA requirement must be fully met by the CET1 capital. This is to ensure that the capital held for HLA purposes must be available to absorb losses on a going-concern basis and, as such, enhance the resilience of the relevant D-SIB.
July 2018DS-1.2.3
Bahraini conventional bank licensees designated as D-SIBs will be subject to an annual inspection by the CBB and two prudential meetings per year.July 2018DS-1.2.4
The HLA requirement and the Pillar 2 capital add-on address the external and internal risks associated with banks from different, but complementary perspectives.
July 2018Disclosure Requirement for D-SIBs
DS-1.2.5
Bahraini conventional bank licensees designated as D-SIBs must disclose their D-SIB HLA requirement in their capital disclosures for the purpose of disclosures of the composition of the bank's capital base.July 2018Recovery and Resolution Plans
DS-1.2.6
Bahraini conventional bank licensees designated as D-SIBs must develop and maintain Recovery and Resolution Plans (RRPs) specific to their circumstances and reflect the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. The RRPs must be approved by the CBB.July 2018DS-1.3 DS-1.3 D-SIBs Assessment Framework
DS-1.3.1
The D-SIBs Assessment Framework aims to assess the degree to which banks are systemically important to the local financial system and domestic economy. Accordingly, the assessment focuses on the impact of a bank's failure within the financial system.
July 2018DS-1.3.2
D-SIBs are identified using a two-step approach. The first step is to draw up a preliminary indicative list of D-SIBs based on the quantitative scores calculated using a set of factors/indicators. The second step involves the exercise of supervisory judgment that may serve as a complement to the quantitative assessment process, i.e. to refine the preliminary indicative list by either (i) removing banks from the list; or (ii) including other banks onto the list.
July 2018DS-1.3.3
The D-SIBs assessment is based on the following four factors:
(a) Sizei. Size is a key measure of systemic importance. The larger the bank, the more widespread the effect of a sudden withdrawal of its services and, therefore, the greater the chance that its distress or failure would cause disruption to the financial markets and systems in which it operates, and to the broader functioning of the economy. The size factor broadly measures the volume of a D-SIB's banking activities within the local banking system and economy and, therefore, provides a good measure of the potential systemic impact in case a bank should fail.ii. The quantitative indicator used in the D-SIBs framework to measure a bank's size is its total assets, as disclosed in the balance sheet.(b) Interconnectednessi. This measure captures the extent of a bank's interconnections with other financial institutions, which could give rise to externalities affecting the financial system and domestic economy.ii. The quantitative indicators used to capture interconnectedness are interbank activities (represented by intra-financial system assets, and intra-financial system liabilities) and securities outstanding.iii. Intra-financial system assets comprise lending to financial institutions (including undrawn committed lines), holding of securities issued by other financial institutions, gross positive current exposure of Securities Financing Transactions and exposure value of those Over the Counter ('OTC') derivatives which have positive current market value. Intra-financial system liabilities comprise deposits by other financial institutions (including undrawn committed lines), gross negative current exposure of Securities Financing Transactions and exposure value of those OTC derivatives which have negative current market value. The total marketable securities issued by the bank comprise debt securities, commercial paper, certificate of deposit and equity issued by the bank. The total marketable securities issued by the bank with the data on maturity structure of these securities will give an indication of the reliance of the bank on wholesale funding markets.(c) Substitutabilityi. The concept underlying substitutability as a factor for assessing systemic importance, is the recognition that the greater the role of a bank in a particular business line, or in acting as a service provider in relation to market infrastructure, the more difficult it will be to swiftly replace that bank and the extent of the products and services it offers, and, therefore, the more significant the risk of disruption in the event that the bank becomes distressed.ii. The quantitative indicators used to capture substitutability are assets under custody (i.e. the value of assets that a bank holds as a custodian), payment activity (i.e. the value of a bank's payments sent through all of the main payments systems of which it is a member) and values of underwritten transactions in debt and equity markets (i.e. the annual value of debt and equity instruments underwritten by the bank). This is based on the logic that the higher the market share of a bank, the more difficult it will be to substitute the extent and level of service it provides.(d) Complexityi. The degree of complexity of a bank is generally expected to be proportionately related to the systemic impact of the bank's distress, as the less complex a bank is, the more 'resolvable' it will likely be, and, in turn, the more likely the impact of its failure could be contained.ii. The quantitative indicators used to capture complexity are the notional value of OTC derivatives (i.e. the ratio of the notional amount outstanding for the bank), Level 3 assets and ratio of the total value of the bank's holding of securities for trading and available for sale category.July 2018Qualitative Indicators
DS-1.3.4
The CBB will apply a supervisory judgmental overlay to the quantitative assessment process recognising that some of the most effective indicators for assessing systemic importance tend not to be of a quantitative nature and, as such, not captured by a quantitative indicator-based measurement approach.
July 2018DS-1.3.5
The CBB's indicative list of qualitative indicators that will typically be considered are:
(a) Anticipated business expansion/contraction;(b) Anticipated mergers and acquisitions;(c) Analysis of exposures to a particular banking group;(d) Settlement institution for any payment or clearing system;(e) Extent of retail banking network;(f) Number of local and overseas branches;(g) Analysis of non-banking business exposure and income;(h) Analysis of non-plain vanilla products /portfolios held;(i) Analysis of off-balance sheet exposures;(j) Complexity of the group structure; and(k) Reputational risk.July 2018Assessment Approach
DS-1.3.6
A weight is assigned to each of the 'size', 'interconnectedness', 'substitutability' and 'complexity' factors. The CBB applies 25 percent equally to all factors towards the final aggregate score.
Category (and weighting) Individual indicator Indicator weighting Size Total assets 25% Interconnectedness Intra-financial system assets 8.33% Intra-financial system liabilities 8.33% Securities outstanding 8.33% Substitutability Assets under custody 8.33% Payments activity 8.33% Underwritten transactions in debt and equity markets 8.33% Complexity OTC derivative notional value 8.33% Level 3 assets 8.33% Trading and available-for-sale securities 8.33% July 2018DS-1.3.7
Bahraini conventional bank licensees that have a minimal amount of exposure to clients in Bahrain, and a low percentage of their deposits base are from clients in Bahrain, will be excluded from the D-SIB assessment.July 2018DS-1.3.8
The CBB shall conduct the D-SIB assessment every two years and shall inform the banks, the relevant thresholds or cut off, and shall provide the DSIBs the guidance for implementation.
July 2018
