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FCMC has identified other systemically significant institutions

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Riga, 10.11.2017

Press Release 

Other systemically significant institutions

 

The Financial and Capital Market Commission (FCMC) is responsible for identifying other systemically important institutions (O-SIIs) pursuant to Article 35.13 of the Credit Institution Law. 

Under the 31.10.2017 Decision No 176 of the FCMC Board, the FCMC has identified the following institutions (in alphabetical order) as O-SIIs: 

ABLV Bank, AS

Akciju sabiedrība "Citadele banka"

Akciju sabiedrība ''Rietumu Banka''

AS ''SEB banka''

Luminor Bank AS

"Swedbank'' AS

The identified six institutions are the same as were identified as O-SIIs in the last year's identification exercise (http://www.fktk.lv/en/media-room/press-releases/6010-fcmc-identifies-other-systemically-significant-institutions-o-siis-under-macro-prudential-supervisory-measures.html) except that AS DNB banka has been replaced in the O-SIIs list by the Luminor Bank AS which started its operations on 1 October 2017 and is a new institution created as the result of the merger of aforementioned AS DNB banka and Nordea Bank AB Latvian business. To identify the O-SIIs, the FCMC followed the methodology provided in the EBA guidelines EBA/GL/2014/10 (hereinafter – Guidelines). The systemic significance of each credit institution was calculated based on the following mandatory criteria and ratios as laid down in Guidelines:

For each credit institution the O-SII score was calculated taking into account mandatory indicator values and weights; in accordance with Guidelines a credit institution is identified as an O-SII if its O-SII score exceeds the threshold for automatic identification of O-SIIs. To ensure that the methodology applied by FCMC is appropriate taking into account specific features of the local financial sector, in identifying O-SIIs the FCMC, in line with previous identification exercises, used the option provided in Guidelines to raise the threshold for automatic identification of O-SIIs to 425 basis points. Due to relatively insignificant extent of investment firms’ activities, the FCMC also used the option provided in Guidelines to exempt investment firms from the process of identifying the O-SIIs. In line with Guidelines, the O-SII score of branches authorised in the Republic of Latvia were included in the denominator of the calculation, however branches themselves were not identified as O-SIIs. 

All six O-SIIs were identified based on automatic approach provided by Guidelines (their O-SII score exceeds 425 basis points). In addition to automatic identification, Guidelines provide the opportunity to identify institutions with an O-SII score lower than the threshold based on optional indicators. The FCMC made an assessment and decided not to identify any other O-SIIs based on optional indicators. 

To increase O-SIIs loss-absorbing capacity and thus mitigate potential systemic risks of the financial system and reduce costs to the national economy the O-SII capital buffer is set for the identified O-SIIs under Article 35.15 of the Credit Institution Law. The O-SIIs identified in 2016 have been since 30.06.2017 complying with the following O-SII buffer rates:

Credit institution

O-SII capital buffer to be maintained as of 30.06.2017

ABLV Bank, AS

1%

AS ''SEB banka''

1%

''Swedbank'' AS

1%

Akciju sabiedrība "Citadele banka"

0.75%

Akciju sabiedrība ''Rietumu Banka''

0.75%

AS DNB banka

0.75%

According to this year's decision of the FCMC's Board identified O-SIIs must ensure compliance with the O-SII capital buffer in line with a following transitional period:

Credit institution

O-SII capital buffer to be maintained as of 31.12.2017

O-SII capital buffer to be maintained as of 30.06.2018

ABLV Bank, AS

1%

2%

AS ''SEB banka''

1%

2%

Luminor Bank AS

1%

2%

''Swedbank'' AS

1%

2%

Akciju sabiedrība "Citadele banka"

0.75%

1.50%

Akciju sabiedrība ''Rietumu Banka''

0.75%

1.50%

The calibration of the size of the applicable O-SII buffers was based on the equal expected impact method wherein it is dependent on the probability of an O-SII facing a financial distress and its systemic significance. The financial distress is in turn defined as an event where the credit institution faces losses during one quarter amounting to at least 2.5% of its risk weighted assets, which is 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 was estimated based on the historical distribution of banking sector return on risk weighted assets (RORWA) quarterly data for period of 2004-2016.

To reduce the probability of financial distress for the identified O-SIIs, it is essential not to only increase the amount of capital buffers to be maintained, but also to ensure that they comply with the highest corporate governance standards. For reasons stated above, in areas related to the risk management and the functioning of the executive and management board and their respective committees, the identified O-SIIs are deemed as systemically important for the purpose of application of certain requirements, as well as they will not be eligible to use certain discretions contained in legislative acts, which may be granted to less significant entities under the FCMC’s authorization. The 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 (Article 34.2 (2) of Credit Institution Law);

- 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 (Article 26.1 of Credit Institution Law);

- requirement to establish a remuneration committee (Paragraph 11 of FCMC Regulation No 126; Regulation on Core Principles of the Remuneration Policy of 02.07.2014);

- requirement to establish a risk committee and a nomination committee, and the possibility to combine the risk committee and the audit committee (Paragraphs 38, 40.1 and 40.2 of FCMC Regulation No 233; Regulation on Establishment of the Internal Control Framework of 01.11.2012).

The FCMC will review the list of identified O-SIIs annually and will publish it by 1 December each year in line with Guidelines. In future, stricter requirements may be applied to the O-SIIs.

 

 

Further information:

Agnese Līcīte

Public Relations Specialist 

Communications Division

Financial and Capital Market Commission

Phone: +371 67774808; e-mail: Agnese.Licite@fktk.lv