Capital buffer for other systemically important institutions

Published: 21.12.2022 Updated: 11.07.2024

Just as the macroprudential policy implementers of other EU countries, Latvijas Banka identifies systemically important institutions (so-called other systemically important institutions; hereinafter – O-SIIs) at least annually. To strengthen the resilience of these institutions to shocks and mitigate the risk that, should these institutions face losses, the rest of the financial system and economy suffer, Latvijas Banka can ask them to build additional (O-SII) capital buffers that would help to cover potential losses.

Latvijas Banka shall be responsible for identifying O-SIIs and setting the O-SII capital buffer rate according to Sections 35.¹³ and 35.¹⁵ of the Credit Institution Law.

Pursuant to the decision adopted by Latvijas Banka on 18.12.2023, five O-SIIs have been identified in Latvia, and they should ensure the compliance with the following O-SII capital buffer rates:

Credit institution	O-SII rate from 20 December 2023	Consolidated level at which the rate should be maintained
Swedbank Baltics AS	2.00%	On a consolidated basis (Swedbank Baltics AS) and on an individual and sub-consolidated basis (Swedbank AS)
AS Citadele banka	1.75%	On a consolidated basis
AS SEB banka	1.75%	On a consolidated basis
AS Rietumu Banka	0.75 %	On a consolidated basis
BluOr Bank AS	0.25%	On a consolidated basis

The previous decision of the Financial and Capital Market Commission on the identified O-SIIs and the applicable O-SII rates was adopted on 20.12.2022.

To reduce the probability of financial distress for the identified O-SIIs, it is essential not to only increase the amount of capital buffers, but also to ensure that O-SIIs comply with the highest corporate governance standards. Therefore, O-SIIs are subject to stricter requirements in the areas related to the risk management and the functioning of the executive and management board and their respective committees, as well as they are not be eligible to certain discretions contained in legislative acts, which may be granted to less significant entities. These requirements applicable are as follows:

requirement to develop strategy, policies, procedures and systems that enable the timely identification, assessment, analysis and management of material risks for an institution;
requirement not to exceed the maximum allowed number of directorships a member of the council or the board of directors may hold concurrently in the council or the board of directors of a credit institution;
requirement to establish a remuneration committee;
requirement to establish a risk committee and a nomination committee, and the possibility to combine the risk committee and the audit committee;
requirement for internal control functions to be independent from the activities they are intended to monitor and control and to be separate from each other.

O-SII identification

O-SIIs are identified according to Guidelines EBA/PN/2014/10 of the European Banking Authority (hereinafter – Guidelines). The systemic importance of every credit institution is assessed, taking into account the criteria and indicators established in the Guidelines.

Criterion	Indicator	Weight
Size	Total assets	25%
Importance (including substitutability/financial system infrastructure)	Value of domestic payment transactions	8.33%
	Private sector deposits from depositors in the EU	8.33%
	Private sector loans to recipients in the EU	8.33%
Complexity/cross-border activity	Value of OTC derivatives (notional)	8.33%
	Cross-jurisdictional liabilities	8.33%
	Cross-jurisdictional claims	8.33%
Interconnectedness	Intra financial system liabilities	8.33%
	Intra financial system assets	8.33%
	Debt securities issued	8.33%
		100%

Taking into account the values and weights of these indicators, the assessment of the systemic importance of every credit institution or the assessment of O-SIIs is calculated annually.

The Guidelines establish an assessment threshold. If this threshold is exceeded, the credit institution is automatically identified as an O-SII (350 points). The Guidelines also foresee a possibility to raise the threshold of the automatic O-SII identification to 425 points or decrease it to 275 points.

Taking into consideration the specificities of Latvia's financial sector, the highest automatic identification threshold (425 points) has been selected for Latvia, and an additional assessment is being conducted on the need to identify credit institutions as O-SIIs when they exceed the threshold, but their size and scope of activities in the internal market prove to be relatively small.

The total calculation includes the assessments of O-SIIs as regards the branches of foreign credit institutions; however, they cannot be identified as O-SIIs. Taking into account the small scope of activities of investment firms, they are not included in the O-SII identification process in Latvia.

O-SII calibration

The O-SII capital buffer rate is calculated based on the equal expected impact approach. The amount of the O-SII capital buffer rate that should be applicable to a credit institution is determined by its potential impact on the rest of the financial system, taking into account the institution's systemic importance and the probability of the institution facing a financial distress. The financial distress is defined as an event where the credit institution faces losses during one quarter amounting to at least 2.5% of its risk weighted assets (equal to the size of the capital conservation buffer it is required to hold). The probability of the credit institution to face a financial distress is estimated based on the historical distribution of banking sector return on risk weighted assets (RORWA) in the period since 2004.

In accordance with the equal expected impact approach, to reduce the potential negative impact of a systemically important institution on the financial system, the O-SII capital buffer rate for it should be set so large that the expected losses (expressed as the probability of facing a financial distress and multiplied by the relative systemic importance of the credit institution) would not exceed the expected losses incurred by the institution which is not identified as an O-SII and for which the O-SII capital buffer requirement has not been set respectively.

Pursuant to Section 35.¹⁵ of the Credit Institution Law, Latvijas Banka may apply the O-SII capital buffer rate of up to 3% of the institution's total exposure amount. Where O-SIIs are subsidiaries of the foreign companies designated as O-SIIs or global systemically important institutions, the applicable O-SII capital buffer rate may not exceed the lowest of the indicators: 1% above the capital buffer rate of the O-SIIs or global systemically important institutions set for the parent bank on a consolidated group basis or 3%. The O-SII capital buffer rate exceeding 3% may only be set upon authorisation from the European Commission.

Financial Stability Report 2016. Other systemically important institutions in Latvia