Improper operation or failure of a SIB can inflict damage on the financial system and have an adverse impact on the economy in general.

This could be caused by their size, complexity of business models, irreplaceability, and systemic connectedness with other market participants.  SIBs, using their weight and importance for the market, can take decisions that are beneficial for them, but not best suited for sustainability and efficiency of the market in general.

Such actions bring down the level of market discipline and distort competition.  Therefore, the regulator’s special attention to systemically important institutions is necessary for safeguarding financial stability.

The methodology for identifying SIBs is based on the European Banking Authority (EBA) guidelines – Guidelines on criteria to assess other systemically important institutions (O-SIIs).

Systemically important banks in Ukraine are identified pursuant to the Regulation on the Procedure for Identifying Systemically Important Banks.

Systemically important banks are identified in two stages.

First stage

The systemic importance indicator is calculated for banks considering the following three criteria: size of a bank, level of its financial connectedness, and its business lines. The criteria include indicators of different weight.  If two or more banks belong to the same banking group, their indicators are calculated on the group basis using the aggregate data.

The share of a bank in the system is calculated for each indicator, then weighted by a respective ratio (weight) and added up.  If the sum is at least 275 bp, the bank is designated systemically important.  Banks that belong to the same banking group have the same indicator of systemic importance.

Indicators for calculation of systemic importance.

Second stage

The banks that were not selected at the first stage are added to the list of systemically important banks if their share in the total amount of guaranteed household deposits in the banking sector exceeds 1%.

The regulator performs enhanced supervision over SIBs and sets additional requirements for them to reduce probability of their failure.

• The systemic importance buffers are set for SIBs.
  The systemic importance buffer is an additional requirement to the core capital.  A bank builds the systemic importance buffer on top of the core capital adequacy ratio.  The capital buffer increases a bank’s ability to absorb unexpected losses, which reduces the risk of default and the scale of its consequences.  The buffer may also level down certain competitive advantages of the systemic institutions, which creates a level playing field in the market for small and medium banks.

Amount of the systemic importance buffer depends on the systemic importance indicator

• SIBs must comply with the enhanced limit on maximum exposure to a single counterparty (N7) of no more than 20% (the general requirement is 25%).

The enhanced requirements to SIBs come into effect on 1 January of the following year after a bank was declared a SIB and stay in force for 12 months after losing the status.