Zimbabwe: RBZ Guards Against Bank Failure

Harare (file photo).

The Reserve Bank of Zimbabwe has put in place policy measures that are meant to ensure that the failure or collapse of a domestic systemically important bank does lead to economic or social costs to people beyond the shareholders, creditors and employees of the distressed institution.

The new framework is also meant to make sure that the fall of a domestic systematically important bank does not lead to a market wide disruption in the provision of financial services.

A domestic systematically important bank (D-SIB) is a banking institution whose sheer size and unique product offerings makes it systemically important thereby presenting potential risks to the entire system and the real economy, in the event of getting into distress.

These banking institutions, according to the RBZ, are sizable, highly interconnected, with less substitutable products or high complexity, and their failure can lead to the paralysis of the economy.

The spill over effects of their collapse include 'disruption in the availability of financial services or supply of credit to the economy directly, to the extent that other banking institutions may not quickly fill the void.

"Loss of confidence and fear of contagion, which in turn leads to tightening of bank funding; and disruption of financial markets if the D-SIB plays a pivotal role in the provision of critical services, such as payments, settlements and custody, to other financial institutions.

As such, the RBZ, in line with various Acts, which gives it the mandate to foster the liquidity, solvency, stability and proper functioning of Zimbabwe's financial system, is putting in place the D-SIB framework.

The framework includes an assessment methodology for the identification and designation of D-SIBS in terms of the degree to which banking institutions are systemically important in a domestic economy.

The assessment focuses on addressing the impact that the distress or failure of a banking institution could cause at a local level.

The methodology focuses primarily on measures of impact of failure, as opposed to measures of risk of failure.

"The D-SIB assessment is based on the following four factors as guided by the Basel Committee on Banking Supervision (BCBS) standards, that is size; interconnectedness; substitutability; and complexity.

The larger the bank and its share of domestic activity, the higher the likelihood that its distress or failure will negatively affect the domestic economy and financial markets.

The quantitative indicator used in the D-SIB framework to measure a banking institution's size is the banking institution's "total loans".

In terms of interconnectedness, balances and placement with or from other banking institutions provide a broad sense of the extent of each banking institution's interconnectedness within the banking sector at an aggregate level.

The concept underlying substitutability as a factor for assessing systemic importance is the recognition that the greater the role of a banking institution in a particular business line or in acting as a service provider, the more difficult it will be to swiftly replace that banking institution.

This also goes to the extent of the products and services it offers, in relation to the market infrastructure, which therefore poses more significant risk of disruption in the event that the banking institution becomes distressed or fails.

Locally, the share of payments received, by either volume or quantum made by a banking institution have been considered as a strong measure of substitutability.

In addition to the assessment methodology, the central bank has also put in place policy measures and additional requirements that shall be applied to D-SIBs in order to address the risks they pose to the financial system and economy at large.

These include, maintaining a higher loss absorbency (HLA) capital requirement and a higher liquidity coverage ratio ("LCR") requirement.

They must also have in place a recovery and resolution planning as well as enhance their disclosure.

The aim of the additional loss absorbency requirement is to ensure that the D-SIBs have a higher share of their balance sheet funded by instruments that re-enforce the resilience of the institution as a going concern.

Banking institutions designated as D-SIBs shall be required to maintain a minimum capital adequacy ratio of 12 percent.

"If and when a designated D-SIB's Tier 1 capital ratio is equal to or below its buffer level, the D-SIB will be subject to restrictions on the discretionary distributions it may make.

"The discretional distributions that may be restricted include dividend payments, share buybacks, discretionary coupon payments on capital instruments and discretionary bonus payments to staff.

"The effect of this is that, for so long a D-SIB's Tier 1 capital ratio is equal to or below its buffer levels, the D-SIB will be required to retain earnings in order to boost its regulatory capital," reads part of the new framework.

In accordance with the risk based supervisory approach, the Reserve Bank will apply appropriate resources and higher degree of supervisory intensity according to the risk a given D-SIB poses.

As part of the measures, the Reserve Bank will conduct an annual D-SIB identification exercise using data as at 31 December of each year.

In exceptional cases, the Reserve Bank may also update the D-SIB list outside of the annual cycle if there are important developments and structural changes within the banking system, such as a merger or a substantial take-over.

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