The Central Bank of Kenya (CBK) has proposed rules that could allow it to limit the expansion of banks that are considered important to the country’s financial system.
The proposal is contained in the draft framework for the identification, regulation and supervision of Domestic Systemically Important Banks (D-SIBs), which CBK has invited the public to comment on.
“The Central Bank of Kenya (CBK) is currently reviewing the Prudential Guidelines (PGS), Risk Management Guidelines (RMGs), Guidance Notes and the Draft Domestic Systemically Important Banks (D-SIBs) Framework issued under the Central Bank of Kenya Act and Banking Act.
This review forms part of CBK’s ongoing efforts to strengthen the regulatory framework, enhance the resilience of the banking sector, and align Kenya’s supervisory framework with international standards and emerging best practices,” read part of the statement.
CBK Draft Rules Could Restrict Expansion of Major Banks
Under the draft regulations, CBK may limit a designated bank’s expansion or prevent it from introducing new products whose effect could heighten the risk it poses to the wider financial system.
The proposed framework targets domestic systemically important banks (D-SIBs), which are lenders whose failure or financial problems could seriously affect Kenya’s financial system and the wider economy.
“D-SIBs may be restricted from expanding their operations or introducing new products whose effect may enhance the systemic risk of the bank,” CBK says in the draft.
In the draft, CBK states that it could restrict such banks from expanding their operations or introducing new products if the move is likely to increase the risks they pose to the financial system.
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How Banks Will Be Classified
If adopted, banks classified as systemically important would be required to hold additional core capital, known as Common Equity Tier 1 (CET1) capital.
The extra capital would range from 0.5 percent to 2.5 percent of their risk-weighted assets, depending on their level of systemic importance.
CBK would determine which banks qualify as D-SIBs using five measures. These are the size of the bank, its links with other financial institutions, the availability of alternative providers of its services, the complexity of its operations and its importance to Kenya’s economy.
A bank’s size would carry the highest weight at 40 percent, followed by interconnectedness at 30 percent. Substitutability would account for 15 percent, importance to the domestic economy 10 percent, and complexity 5 percent.
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A bank could be classified as systemically important if it scores more than 0.25 overall or reaches at least 0.05 in any one of the categories.
D-SIBs would also face closer supervision from CBK. This would include more frequent reviews, quarterly stress tests, annual assessments of their capital and liquidity levels, and preparation of recovery and resolution plans.
CBK said that the measures in the draft aim to reduce the risk of a major bank failing and limit the impact on the wider financial system if such a failure occurs.
The framework would also seek to reduce the expectation that the Government would have to support a major bank because of its importance to the economy.
CBK plans to assess banks every year using data as of December 31. The CBK would notify banks identified as systemically important by the end of March and publish the list by June.
Newly identified D-SIBs and banks moved to a higher category would have up to 12 months after notification to meet the additional capital requirements.
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