Issues when the parental and host country systemic institution buffers differ: the case of Czechia

Abstract

The article analyses regulatory reforms in the EU to the capital buffers for mitigating risks associated with institutions' systemic importance in the Capital Requirements Directive (CRD). The Directive includes a buffer for other relevant institutions (O-SIIs) and limits its size to a general cap and a specific cap for subsidiaries. However, the specific subsidiary cap may limit national authorities' ability to set a sufficient buffer for domestic institutions that are members of European banking groups to cover risks to the domestic market. It also may lead to a situation where two institutions of similar systemic importance could be subject to different O SII buffer rates because their owners are of different systemic importance and have different O-SII buffer rates in different EU jurisdictions. The amended CRD V increases the general and subsidiary cap for the O-SII reserve by one percentage point. However, the cap for subsidiary institutions remained in force, which limits the setting of capital buffers, especially for banking sectors with significant foreign ownership. These include mainly countries of the former Soviet-aligned Eastern Bloc. This paper outlines shortcomings of the subsidiary cap, argues for a revision of it to ensure level playing field in these capital buffers and quantifies the impact of the subsidiary cap according to the CRD IV and CRD V on the capital requirement applied to the Czech banking sector.