Recommendation FMSB/3/2021: guidance on adjusting the other systemically important institution (O-SII) buffer

In its 29^th meeting on September 15, 2021, the Financial Market Stability Board (FMSB) evaluated the other systemically important institutions (O-SII) buffer. Both the group of institutions identified as O-SIIs and buffer levels did not change materially¹ compared to the previous year.

O-SIIs can create risks to a country’s financial system. Their systemic relevance and anticipation of bailout in the event of a crisis may cause moral hazard. O-SII buffers reduce the likelihood of bank failures and therefore (partly) offset the higher social costs that would result from the malfunctioning or failure of a credit institution. The Austrian Bank Recovery and Resolution Act (BaSAG) likewise contributes to addressing these risks, as it allows banks to exit the market at lower social cost.

The EBA guidelines (EBA/GL/2014/10) established a two-step process for identifying O-SIIs. In the first step, banks are given a score according to the following indicators: (1) size, (2) importance for the economy of the EU or of the relevant EU member state, (3) complexity/cross-border activity, and (4) interconnectedness of the institution or group with the financial system (see Article 23d Austrian Banking Act). In the second step, the national authorities use supervisory judgment, i.e. they draw on their expertise on the relevant banking sector to ensure that any further systemically important banks are identified as O-SIIs even if they were not identified as such in the first step.

In 2018, the FMSB adopted a number of quantitative tools to underpin the expertise provided by the national supervisors. First, guaranteed deposits were introduced as an additional indicator, given that banks that hold a high share of guaranteed deposits, which would (over)burden the deposit guarantee system in an insurance event, are highly relevant to the entire system. Second, a bank that would not qualify as O-SII based on its average EBA scores may still pose a threat to financial stability if any one of the indicators applied in line with the EBA guidelines shows that this bank is particularly exposed. In addition, banks may be systemically important not only at the consolidated but also at the unconsolidated, i.e. solo, level.

On May 29, 2021, the law implementing the reviewed Capital Requirements Directive (CRD V) in Austria entered into force. Based on this law, the O-SII buffer and the systemic risk buffer (SyRB) are now deemed additive (Article 131 and 133, CRD V). While the uncertainty about the effect of the coronavirus crisis on overall economic conditions and the financial system observed in 2020 has somewhat abated, it is still too high to allow the concept of additivity to be implemented in the best way possible, i.e. to completely recalibrate the two buffers. The FMSB therefore recommends that the adjustments made in 2020 be kept so that the effective buffer requirements are not raised before end-2022 solely because of the changed legal framework, which would also be in line with recommendation FMSB/3/2020.

The FMSB hence recommends the following sizes for the SyRB and the O-SII buffers at the consolidated and the unconsolidated level:

In line with Article 23d para. 1 Austrian Banking Act, the FMSB recommends that the Financial Market Authority (FMA) prescribe O-SII buffer rates as specified in the table.

¹ For UniCredit Bank Austria, the effective buffer increases from 0.5% to 1% at the unconsolidated level (after COVID-19-related uncertainties have been taken into account). This does not represent a material change, however, given that in this case, the buffer requirement at the consolidated level is economically binding.