Chapter Two: Banks of Systemic Importance Locally

In light of the continuous efforts of the Central Bank of Egypt to develop the banking sector to enhance its safety and stability and support its effective role in contributing to achieving comprehensive and sustainable economic growth for the state, and within the framework of the constant desire to keep pace with the latest international practices in banking supervision aimed at facing risks and responding to existing and potential shocks, as well as strengthening the capital base of banks.

And since the global crisis showed that some institutions are of importance to the global financial system and may be exposed to risks that threaten the stability and performance of the entire financial system in the event of their failure or impairment, the Basel Committee on Banking Supervision issued in November 2011 a practical methodology for identifying "Globally Systemically Important Banks (G-SIBs)" (identified in July 2013), and from then on, additional loss absorbency requirements were imposed on those banks to mitigate the probability and recurrence of their failure or impairment. And since the systemic importance of banks is not limited to the global level only, but the principle applies to what may be at the local level as well, due to the negative repercussions of such banks on the entire local banking system, which in turn can affect the local economy as a whole, the Basel Committee on Banking Supervision established in October 2012 a complementary supervisory framework to the previous one but at the level of banks within a single state to identify "Locally Systemically Important Banks" (L-SIBs). The general framework includes the criteria and basic principles from which central banks formulate their own frameworks.

This, and the Central Bank has prepared a study to identify locally systemically important banks, and based on this, the Board of Directors of the Central Bank of Egypt decided in its meeting held on March 29, 2017 the following:

The Central Bank of Egypt identifies locally systemically important banks according to the attached methodology.

1. The Supervision and Inspection Sector of the Central Bank of Egypt applies the aforementioned methodology, reports the results, and determines the additional capital requirements that these locally systemically important banks must form according to the following table:

Bucket	Total Exposure (Million EGP)	Additional Capital Requirement %
5	Greater than 3,200	5%
4	From 2,501 to 3,200	1.25%
3	From 1,801 to 2,500	1%
2	From 1,101 to 1,800	0.75%
1	From 1,100 to 400	0.5%
Locally Systemically Important Banks	From 0 to 399	0.25%

2. The methodology is reviewed and updated by the Central Bank of Egypt according to market developments, with a maximum frequency of once every three years.

3. These instructions apply to banks operating in Egypt starting from January 1, 2019, for banks whose annual financial statements are prepared at the end of December of each year, and starting from July 1, 2019, for banks whose annual financial statements are prepared at the end of June of each year.

Central Bank of Egypt Methodology for Identifying Locally Systemically Important Banks

1. A sample of banks is selected according to the "Total Exposure" criterion used in calculating the leverage ratio.

2. The following main indicators are used:

   • Bank size.
   • Degree of interconnection with other banks within the state.
   • Lack of alternatives for the financial services provided by the bank or its role in the financial sector's infrastructure.
   • Degree of development or complexity of the bank's activities.

3. These indicators are given relative weights as follows: 40%, 25%, 20%, and 15% respectively. The main indicators may be divided into two sub-indicators, with equal relative weights as shown in the following table:

Relative Weight	Main Indicator (Derived)	Sub-Indicator
20%	Total Exposure used in the leverage ratio: Domestic and foreign assets weighted by risk weights. Total deposits.	1. Bank Size (40%)
20%	Assets due to other banks within the state. Liabilities due to other banks within the state.	2. Degree of Interconnection with Other Banks (25%)
20%	Lack of alternatives for financial services provided by the bank, or its role in the infrastructure of the banking sector. Payments settled through the payment system.	3. Lack of Substitutability (20%)
7.5%	Assets due to banks. Liabilities due to other banks.	4. Degree of Development or Complexity of Bank Activities (15%)
7.5%

4. The indicators for the bank are calculated in points by following the steps below: a. Calculate the value of the sub-indicator = (Value of the indicator for the bank / Value of the indicator for total banks) x 10,000. b. Calculate the simple average of the sub-indicators within the main indicator. c. Calculate the weighted average with specified weights for the four main indicators of the bank to arrive at the bank's result.