Banking Law and Domestic Systemically Important Banks Frameworks in Kuwait

Introduction

A domestic systemically important bank, or D-SIB, is a bank whose failure could seriously disrupt the national financial system and wider economy. Its importance may arise from its size, connections with other financial institutions, concentration of deposits, participation in payment systems or provision of services that cannot easily be replaced.

Kuwait’s D-SIB framework is administered by the Central Bank of Kuwait and is based substantially on the Basel Committee’s framework for domestic systemically important banks. The objective is not to guarantee that an important bank will never fail. It is to reduce the probability of failure, strengthen loss-absorbing capacity and limit the economic consequences of financial distress.

Legal and Regulatory Framework

Law No. 32 of 1968 concerning Currency, the Central Bank of Kuwait and the Regulation of Banking Business gives the CBK broad authority to license, regulate and inspect banks. The CBK may require information, examine records, issue prudential instructions, impose corrective measures and penalise non-compliance.

Kuwaiti banks must also comply with the CBK’s Basel III capital framework, corporate-governance rules, liquidity requirements, large-exposure limits, risk-management instructions and anti-money-laundering obligations.

The D-SIB framework supplements minimum capital requirements. A bank designated as systemically important must maintain an additional Common Equity Tier 1 capital buffer. Under the disclosed CBK framework, the D-SIB buffer may generally vary from 0.5% to 2% of risk-weighted assets, depending on the bank’s assessed systemic importance. The precise requirement is communicated by the CBK and may change following reassessment.

Identification of a D-SIB

The CBK’s assessment reflects the Basel Committee’s main indicators.

1. Size

A large bank controls a significant percentage of domestic banking assets, deposits or lending. Its sudden failure could restrict credit, cause depositor panic and require extensive intervention.

2. Interconnectedness

The CBK considers exposures to other banks and financial institutions. A highly interconnected bank may transmit losses through interbank lending, payment obligations, derivatives, guarantees or securities holdings.

3. Substitutability

Some banks provide services that cannot quickly be replaced, including government banking, custody, clearing, corporate payments, trade finance or extensive retail deposit services.

4. Complexity

Cross-border subsidiaries, structured products, Islamic financing arrangements, derivatives and complicated group structures may make resolution slower and more expensive.

5. Domestic characteristics

The CBK may apply supervisory judgment to reflect Kuwait’s concentrated banking sector, dependence on major banks, government-related exposures and the coexistence of conventional and Islamic banking institutions.

Regulatory Consequences

The higher capital buffer is intended to make shareholders absorb more losses before depositors or the public sector are exposed. Falling below a required buffer may restrict dividends, discretionary bonuses or other distributions and trigger a capital-restoration plan.

D-SIBs are also generally subject to stronger supervisory expectations concerning:

Board oversight and risk governance;

Internal capital-adequacy assessment;

Stress testing and scenario analysis;

Liquidity and funding concentration;

Recovery planning;

Operational and cyber resilience;

Outsourcing and third-party risks;

Group-wide risk aggregation;

Large exposures and related-party transactions;

Public Pillar 3 disclosures.

The CBK may inspect a D-SIB at any time. Under Article 78 of the CBK Law, inspectors may examine accounts, books, records, instruments and other necessary documents. Article 79 provides consequences for refusing information or knowingly supplying false information.

Recovery, Intervention and Resolution

A D-SIB should prepare credible options for restoring capital and liquidity during serious stress. Measures may include asset sales, restrictions on distributions, disposal of subsidiaries, reduction of risk-weighted assets and activation of emergency funding arrangements.

Articles 63 and 64 of the CBK Law provide significant intervention powers where a bank’s liquidity or solvency is endangered. The CBK may restrict operations, appoint a temporary controller or assume management for a specified period. These powers protect depositors but do not remove the need for a comprehensive modern resolution framework dealing with bail-in, transfer powers and continuity of critical services.

Case Laws

Reported Kuwaiti judgments dealing specifically with D-SIB designation are limited. The following comparative authorities explain principles that are relevant to Kuwait but are not binding on Kuwaiti courts.

1. Landeskreditbank Baden-Württemberg v European Central Bank, Case C-450/17 P

The Court upheld the broad supervisory framework used to classify significant banks. The decision demonstrates that systemic classification depends on the applicable regulatory criteria and not merely on a bank’s preferred view of its risk profile.

2. Crédit Mutuel Arkéa v European Central Bank, Cases C-152/18 P and C-153/18 P

These cases examined consolidated prudential supervision within a banking group. They illustrate why a regulator may assess group-wide risks rather than viewing each entity independently.

3. Berlusconi and Fininvest, Case C-219/17

The Court considered the integrated process for reviewing qualifying holdings in banks. It confirms that ownership and control of systemically important institutions are matters of prudential concern rather than purely private corporate decisions.

4. Peter Paul v Germany, Case C-222/02

The Court held that prudential supervisory rules primarily protect the stability of the financial system and do not necessarily create individual damages claims for every depositor. The case distinguishes public supervision from private guarantees.

5. Kotnik and Others, Case C-526/14

The Court examined burden-sharing by shareholders and subordinated creditors before public support was provided to distressed banks. It supports the principle that investors should absorb losses before taxpayer-funded rescue measures are used.

6. Ledra Advertising v European Commission and European Central Bank, Joined Cases C-8/15 P to C-10/15 P

The Court considered losses imposed during banking-sector restructuring and confirmed that financial-stability measures must still respect fundamental legal rights. Regulatory intervention must therefore be lawful and proportionate.

7. Banco de Portugal v VR, Case C-504/19

This case concerned recognition of bank-resolution measures across borders. It demonstrates the importance of legal certainty regarding which liabilities remain with a failed bank and which are transferred to a continuing institution.

8. Gauweiler and Others, Case C-62/14

The Court upheld significant central-bank measures adopted to protect monetary-policy transmission, subject to proportionality. The decision illustrates the broad discretion commonly granted to central banks when systemic stability is threatened.

Conclusion

Kuwait’s D-SIB framework combines systemic-importance assessment, additional capital requirements and enhanced CBK supervision. Banks are evaluated according to size, interconnectedness, substitutability, complexity and domestic market conditions. Designation brings stronger capital, governance, liquidity, disclosure and recovery-planning duties. Although direct Kuwaiti D-SIB litigation remains limited, comparative cases show that systemic-bank regulation must balance financial stability, supervisory discretion, investor responsibility and procedural fairness.