Other systemically significant institutions

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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 27.11.2019 Decision of the FCMC Board, the FCMC has identified the following institutions (in alphabetical order) as O-SIIs:

  • Akciju sabiedrība “Citadele banka”
  • Akciju sabiedrība ”Rietumu Banka”
  • AS ”SEB banka”
  • “Swedbank” AS

The identified five institutions are the same as were identified as O-SIIs in the last year’s identification exercise with the exception of Luminor Bank AS, which since 02.01.2019 operates in Latvia as a branch. 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, as well as carried out further assessment on the necessity to identify as O-SII institutions which scored above that threshold. 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 identified 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. According to this year’s decision of the FCMC board as of 27.11.2019 identified O-SIIs shall maintain the O-SII buffer rates as shown in the table below (the rates remain unchanged compared to the previous decision):

Credit institution O-SII capital buffer to be maintained as of 27.11.2019
”Swedbank” AS 2%
AS ”SEB banka” 1.75%
Akciju sabiedrība “Citadele banka” 1.50%
Akciju sabiedrība ”Rietumu Banka” 1.25%

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 2004-2018.

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 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 (REICF));

– 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 (Paragraphs 62-64 of REICF).

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.

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