SBP increases regulatory needs for big banks

KARACHI: The central bank on Thursday named three big banks that are to comply with enhanced supervisory and regulatory standards considering huge size of their transactions volume and to strengthen their resilience to shocks.

The State Bank of Pakistan (SBP) named domestic systemically important banks (D-SIBs) in line with the D-SIBs introduced in April. “On the basis of the designation criteria, State Bank has designated Habib Bank Ltd (HBL), National Bank of Pakistan (NBP), and United Bank Ltd (UBL) as D-SIBs,” the SBP said in a statement.

“These banks will be required to follow enhanced supervisory and regulatory requirements, including the higher loss absorbency capital surcharge in the form of additional core equity tier-1 capital (CET1).”

The HBL will need to maintain CET1 of two percent while NBP and UBL will maintain additional CET1 of 1.5 percent.

In August last, Habib Bank Ltd voluntarily decided to close its operations in New York in an orderly manner. The decision should, however, not impact the international and domestic business of Habib Bank Ltd as the bank has correspondent business relationships in place in most locations which will enable Habib Bank Ltd’s customers to continue transacting their business (including their US dollar business) as they have been doing in the past.

The New York State Department of Financial Services had sent a notice of hearing to Habib Bank Ltd that sought to impose a civil monetary penalty for violation of the compliance program. The State Bank of Pakistan said the banks designated as D-SIB will be required to meet enhanced supervisory and regulatory requirements by end of March 2019.

The central bank said the branches of global-systemically important banks (G-SIBs) operating in Pakistan will hold additional CET1 capital against their risk-weighted assets in Pakistan at the rate as applicable on the respective G-SIB. The D-SIBs framework as introduced by State Bank is consistent with the international standards and practices and takes into account the local dynamics.

It specifies the methodology for identification and designation of D-SIBs, enhanced regulatory and supervisory requirements, and implementation guidelines.

The enhanced requirements aim to further strengthen the resilience of big banks towards shocks and augment their risk management capacities.

The identification of D-SIBs involves two-step process. In the first step, sample banks are identified each year based on the quantitative and qualitative criteria. In the second step, D-SIBs are designated from among the sample banks on the basis of institutions’ systemic importance score as determined by their size, interconnectedness, substitutability, and complexity.