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 bufers for mitigating risks associated with institutions'systemic importance in the Capital Requirements Directive (CRD). The Directive includes a bufer for other relevantinstitutions (O-SIIs) and limits its size to a general cap and a specifc cap for subsidiaries. However, the specifc subsidiarycap may limit national authorities' ability to set a sufcient bufer for domestic institutions that are members of Europeanbanking groups to cover risks to the domestic market. It also may lead to a situation where two institutions of similar systemicimportance could be subject to diferent O SII bufer rates because their owners are of diferent systemic importance and havediferent O-SII bufer rates in diferent EU jurisdictions. The amended CRD V increases the general and subsidiary cap forthe O-SII reserve by one percentage point. However, the cap for subsidiary institutions remained in force, which limits thesetting of capital bufers, especially for banking sectors with signifcant foreign ownership. These include mainly countriesof the former Soviet-aligned Eastern Bloc. This paper outlines shortcomings of the subsidiary cap, argues for a revision ofit to ensure level playing feld in these capital bufers and quantifes the impact of the subsidiary cap according to the CRDIV and CRD V on the capital requirement applied to the Czech banking sector.