The Central Bank of Kenya (CBK) is set to tighten regulatory requirements for banks considered important to the stability of the country’s financial system to make them better prepared for shocks and reduce the impact of major failures.

🇰🇪 Breaking It Down

Under proposals seen by Kenyans.co.ke , CBK will use a new framework to identify Domestic Systemically Important Banks (D-SIBs) whose failure could significantly disrupt financial services and the wider economy.

The framework will assess banks based on their size, links with other financial institutions, role in providing critical services, complexity, and importance to the domestic economy.

“The objectives of this framework therefore include, among others: To enhance the resilience of D-SIBs by applying higher loss absorbency (HLA) requirements and to limit the impact of systemic shocks on the financial system by ensuring that D-SIBs are subjected to an appropriate level of regulation and supervision that is commensurate with their systemic importance,” the new proposals read in part.

📌 What You Need to Know

Banks that meet the thresholds will be placed into different categories depending on their importance to the financial system. The largest banks will be required to hold an extra 2.5 per cent of their risk-weighted assets as capital, while other designated banks will face additional requirements of 1.5 per cent or 0.5 per cent.

The additional capital will give banks more room to absorb losses if they face financial difficulties and help limit the impact on the wider banking system.

For customers, the measures are expected to strengthen major banks and reduce the risk of disruptions to deposits, payments and access to banking services during periods of financial stress.

At the same time, CBK will subject the designated banks to more intensive supervision, including more frequent examinations and closer monitoring of their risk management and governance.

Additionally, the banks will be required to conduct stress tests every quarter to assess how they would withstand severe economic and financial shocks.

They will also have to prepare and regularly update recovery and resolution plans setting out how they would respond to serious financial distress.

📰 Source: Kenyans.co.ke