Systemically Important Institutions

Other Systemically Important Institutions (O-SIIs) are institutions which are systemically important to the domestic economy or to the economy of the European Union (EU). An institution's systemic importance is assessed based on (i) size, (ii) importance for the economy of the Union or of the relevant Member State, (iii) significance of cross-border activities, (iv) interconnectedness of the institution or group with the financial system. The definition and criteria for O-SIIs is set out in Article 131 of Capital Requirements Directive (CRD).

The objective of requiring O-SIIs to maintain additional capital (i.e. an O-SII buffer) is to reduce both the probability and impact of a systemically important institution’s failure. A higher capital requirement for these institutions acknowledges the greater impact that their failure would have.

The Central Bank of Ireland is the authority in Ireland responsible for identifying O-SIIs and setting O-SII buffers for identified institutions. This power was designated to the Central Bank in European Union (Capital Requirements) Regulations 2014, which transposed the CRD IV into Irish law.

In the context of the Single Supervisory Mechanism (SSM) (i.e. the supervisory arm of the ECB), where O-SII buffers are a joint competence between national designated authorities and the ECB, O-SII decisions are taken by the Central Bank having consulted with the ECB. Nonetheless, the ECB has the power to impose higher O-SII buffers than national authorities if they consider it necessary.

At present, each O-SII can be required to maintain a buffer of up to 3% of total risk exposures.  Prior to the introduction of CRD V the O-SII was capped at 2%.

An exception to this applies where the O-SII is a subsidiary of an institution, which is itself subject to a capital buffer arising from its systemic importance. In this case, the maximum buffer the O-SII can receive shall not exceed the lower level of:

• the sum of the O-SII buffer rate at the parent level and 1% of the total risk exposure amount, and
• 3% of the total risk exposure amount or the higher buffer rate authorised at the parent level by the European Commission.

For example where due to its systemic importance a cross-border Banking Group is subject to a capital buffer of 0.5%, the maximum O-SII buffer a national authority can apply to a subsidiary of this Group located within its jurisdiction would be 1.5% (rather than the standard 3% limit). In circumstances where a 2.5% buffer applied to the Group, the O-SII buffer limit for a subsidiary would then be 3%.

It is possible to exceed this 3% cap, However, European Commission authorisation is required, following the consideration by the Commission of the opinions of the ESRB and the EBA.

O-SII buffer requirements take the form of Common Equity Tier 1 (CET1) capital. In general, O-SII buffers are set based on the principle that relatively more systemically important institutions should receive relatively higher buffers.

Within the SSM, the ECB has developed an O-SII buffer floor methodology which places minimum buffer requirements on O-SIIs based on their level of systemic importance.

The Central Bank undertakes an O-SII review at least annually. See recent O-SII announcements.

Formally, O-SII decisions are taken by the Governor. Prior to any decision, the issue is discussed at the Financial Stability Committee (FSC) which acts as an advisory committee to the Governor in this regard. The ECB are also consulted in advance of a decision.

O-SII assessments conducted by the Central Bank are made without prejudice to any powers of the ECB under the SSM Regulations.

The process for identifying O-SIIs involves assessing the systemic importance of an institution. In addition to the requirements set out in CRD, the European Banking Authority has issued guidelines on the criteria for assessing the systemic importance of an institution. To date, the Central Bank has applied the EBA guidelines when identifying O-SIIs. The EBA guidelines set out a two stage process: (i) a mandatory scoring methodology based on quantitative indicators relating to an institution's size, importance, complexity/cross-border activity, and interconnectedness and (ii) supervisory assessment where designated authorities can designate additional institutions as O-SIIs if deemed appropriate based on (prescribed) additional qualitative and quantitative indicators.

Buffer calibration is less formal. The approach of the Central Bank to calibrating O-SII buffers takes account of high-level principles set out by the Basel Committee on Banking Supervision relating to domestic systemically important institutions, the requirements of CRD, the ECB floor methodology and the specificities of the Irish economy.

In addition, buffer calibration is informed by a number of quantitative approaches.

• a simple scaling where an institutions buffer is benchmarked relative to the largest institution
• a bucketing approach where each institution falls into a given buffer rate “bucket” based on size and/or its market share in the domestic deposit and lending markets;
• an expected impact framework which aims to equalise the expected impact of each O-SII with that of a reference non-O-SII.

Beyond ensuring compliance with the ECB floor methodology, the Central Bank does not employ a mechanical link between any of these quantitative approaches and the O-SII buffer rate. In reaching a judgement on the setting of O-SII buffer rates, the Central Bank considers measures of systemic importance relating to institutions’ linkages with the domestic economy as well as broader measures that would be relevant from the perspective of European financial stability.