Regulator Approves! 7 Banks Cleared for IRB Method, Effective Q4 2026, Unlocking Long-Term Dividend Flexibility

The Financial Supervisory Commission (FSC) officially announced today (28) that it has approved 7 domestic banks—Hua Nan Commercial Bank, First Commercial Bank, Mega International Commercial Bank, Taipei Fubon Bank, Cathay United Bank, E.SUN Commercial Bank, and CTBC Bank—to adopt the Internal Ratings-Based (IRB) approach for calculating capital requirements. The new system will officially take effect in the fourth quarter of 2026, with the average capital adequacy ratio (BIS) of these 7 banks projected to increase by 0.34 percentage points, significantly strengthening Taiwan’s banking sector’s international competitiveness and risk management capabilities. The FSC expects to open applications for a second cohort of banks by the second half of 2027 at the latest.

The IRB approach allows banks to use internal rating models to more precisely assess credit risk, including probability of default (PD) and loss given default (LGD), enabling a more accurate measurement of asset risk and capital needs. With the approval of the first 7 banks, these institutions are expected to gain greater flexibility in capital allocation and dividend distribution.

Following applications submitted in the first half of 2024, the FSC formed a special review task force with the Joint Credit Information Center and the Central Deposit Insurance Corporation. After undergoing preliminary and secondary reviews, on-site inspections, and a one-year pilot phase, the team conducted a comprehensive evaluation of the banks’ risk management frameworks, model governance, and operational practices. All 7 banks were confirmed to meet the required standards and have now received formal approval.

Wang Yun-chung, Deputy Director of the Banking Bureau, emphasized that banks using the IRB method must continue to meet strict threshold requirements. These include maintaining total assets above NT$2.5 trillion and ensuring that the Common Equity Tier 1 (CET1) ratio, Tier 1 capital ratio, and total capital adequacy ratio—calculated under both the standardized approach and IRB approach—remain above 9.5%, 11%, and 13%, respectively. These thresholds exceed the general statutory minimums of 7%, 8.5%, and 10.5% for regular banks. Failure to meet these standards will result in the suspension of IRB usage.

Regarding concerns about whether Domestic Systemically Important Banks (D-SIBs) could lower their capital requirements by adopting IRB, Wang clarified that D-SIBs must still maintain their higher capital buffers—11%, 12.5%, and 14.5%—and will not see any reduction in capital standards due to IRB adoption.

To ensure a stable and gradual implementation, the FSC has introduced a 5-year transition period for the Basel III 'Output Floor' requirement.

Wang explained that under the traditional standardized approach, risk-weighted assets (RWA) are calculated using fixed coefficients. A direct switch to IRB could cause RWA to drop sharply, leading to an abrupt spike in capital ratios. To avoid excessive capital volatility during the model’s early stages, the FSC has adopted a conservative, phased approach by setting a gradually declining 'floor limit'.

Starting in Q4 2026, the first 7 banks will be subject to a 95% output floor. This will decrease by 5 percentage points annually: 90% in Q4 2027, 85% in Q4 2028, 80% in Q4 2029, 75% in Q4 2030, and finally reaching 72.5% in Q4 2031.

Wang illustrated this with an example: if a bank’s calculated RWA drops from NT$10 billion to NT$9 billion (90%) under IRB, it must still use 95% (NT$9.5 billion) in Q4 2026—only reducing RWA by NT$500 million. The full benefit of the 90% floor will only be realized starting in Q4 2027, ensuring a smooth and controlled transition.

Regarding the second cohort of banks, Wang stated that the FSC will closely monitor the financial and operational impacts, as well as market reactions, from the first group. Applications from a second group are expected to open by the second half of 2027. Eligibility criteria will be reviewed dynamically based on experience, but the core risk management principles will remain consistent to ensure fairness and overall financial stability.