The Central Bank of Kenya (CBK) has proposed a new framework for identifying, regulating and supervising Domestic Systemically Important Banks (D-SIBs), marking a significant shift towards a more differentiated approach to banking-sector supervision. The framework, issued for public participation alongside revised Prudential and Risk Management Guidelines, seeks to identify banks whose distress or failure could have significant consequences for Kenya’s financial system and wider economy. The proposals are part of CBK’s broader efforts to strengthen the resilience of the banking sector and align Kenya’s supervisory framework with international standards.
At the center of the framework is the recognition that not all banks pose the same level of systemic risk. A failure of a relatively small institution may be contained within the banking sector, while the failure of a large, highly interconnected or difficult-to-replace institution could transmit stress across financial markets and the wider economy. CBK therefore proposes to assess banks based on five indicators: size, interconnectedness, substitutability, complexity and importance to the domestic economy. The framework replaces the Basel indicator of cross-jurisdictional activity with importance to the domestic economy, reflecting the characteristics of Kenya’s financial system.
Size carries the largest weight at 40.0%, reflecting the potential impact of the failure of a large bank. Interconnectedness accounts for 30.0% and captures a bank’s exposure to other financial institutions through deposits, balances and interbank activity. Substitutability accounts for 15% and considers areas such as lending to households and the trade sector as well as payments cleared through the RTGS system. Complexity carries a 5.0% weight, while importance to the domestic economy accounts for the remaining 10.0%, based on customer deposits and the bank’s assets relative to GDP.
The framework would then assign banks identified as systemically important to three buckets according to their systemic-risk scores. This is important because being classified as a D-SIB would come with additional capital requirements. The proposed Higher Loss Absorbency (HLA) requirement would range from an additional 0.5% to 2.5% of risk-weighted assets in Common Equity Tier 1 (CET1) capital, depending on the bank’s systemic importance. Banks in the highest bucket would therefore face the largest additional capital requirement.
The proposed framework goes beyond capital requirements. D-SIBs would be subject to enhanced supervision, including more frequent examinations and closer monitoring of risk management, governance and internal controls. They would also be required to conduct quarterly stress tests and undertake Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) at least annually. In addition, designated banks would be required to maintain recovery and resolution plans, while CBK could impose enhanced disclosure requirements, liquidity surcharges and, where necessary, restrictions on activities that could increase systemic risk.
For the banking sector, the framework could have important implications for competition and consolidation. Larger banks that are designated as D-SIBs would have to hold more capital, which could constrain the amount of capital available for dividends, acquisitions or balance-sheet expansion. However, stronger capital buffers could also improve market confidence and reduce the probability that a large bank’s difficulties would require public-sector intervention. For smaller banks, the framework could create an additional incentive to strengthen capital and risk-management frameworks as they grow, particularly if expansion increases their systemic importance.
Importantly, CBK has not yet identified the banks that will fall under the D-SIB framework. The assessment is proposed to take place annually using data as at 31st December, with designated banks to be notified by the end of March and the list published by June each year. Banks moving into a higher systemic-risk category would receive up to 12 months to meet the additional capital requirement. The framework will only take effect on a date to be advised by CBK, while the current proposal is undergoing public participation, with comments due by 7th November 2026.
The proposed D-SIB framework represents a move towards a banking system in which regulation is increasingly calibrated to the level of systemic risk posed by individual institutions. For Kenya, this could strengthen financial stability by requiring banks whose failure would have the greatest economic consequences to maintain larger capital buffers and stronger recovery mechanisms. For investors, the key question will be how the framework changes the balance between capital strength, growth, profitability and shareholder returns. As the first D-SIB assessments approach, the framework could therefore become an increasingly important consideration in evaluating the relative attractiveness and risk profiles of Kenya’s listed and unlisted banks.
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