Sri Lanka trims systemically important banks in new D-SIB rule, capital buffers changed

ECONOMYNEXT – Sri Lanka has designated four banks as domestically systemically important banks (D-SIB) under new criteria down from an earlier broad listing of six large banks, while also issuing new capital requirements.

The central bank has named state-run Bank of Ceylon and private Commercial Bank of Ceylon as the most important banks in the system, which require a higher loss absorbency (HLA) capital surcharge of 1.5 times of a broadly net assets number as Common Equity Tier I capital in a so-called ‘bucket 2’ category under BASEL rules.

There were no ‘bucket 03′ banks, requiring a surcharge of 2.0 times in Sri Lanka.

State-run Peoples’ Bank and privately owned Hatton National Bank have been named in a ‘bucket 01’ category with a HLA ratio of 1.

The “primary objective of the implementation of the D-SIBs framework is D-SIBs to hold higher capital buffers and to provide incentives to reduce their systemic importance on the domestic economy,” the central bank said in a direction.

Sri Lanka’s central bank had earlier named six banks, including Sampath Bank and Seylan Bank as systemically important banks in Sri Lanka.

Other banks reaching assets of 500 billion rupee were also expected to be named D-SIBs.

However, following revised BASEL rules issued in October, a more complex method, where size is give a 40 percent weight, has been adopted.

Three other criteria are weighted 20 percent each: interconnectedness (intra-financial assets/liabilities, securities issued 20 percent), substitutability financial system (assets in custody, trading volume, payments activity) and complexity (derivatives/international presence).

Under the new rules, Bank of Ceylon and Commercial Bank will continue to have the same capital adequacy requirements as previously.

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Common Equity Tier 1 capital will be 8.50 percent for the two banks, while Total Tier 1 capital is 10 percent and total capital ratio is 14 percent.

For Hatton National Bank and People’s Bank, the total capital adequacy requirement is 0.5 percent lower.

Meanwhile, Sampath Bank and Seylan Bank will have lower capital requirements, falling back to the normal regulations applicable for all other banks, which have remained unchanged.

Common Equity Tier 1 capital requirement is 7 percent for all non D-SIB banks, while Total Tier 1 capital buffer is 8.5 percent and Total Capital Requirement is 12.5 percent.

Banks that exceed a leverage exposure measure of 400 million rupees as define under BASEL rules are considered for the new framework. (Colombo/Dec23/2019)

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