Greater Dividend Potential Ahead! FSC Approves First 7 Major Banks to Adopt IRB Method, Market Expects Operational Efficiency Upgrade

To continuously enhance credit risk management capabilities of domestic banks, the Financial Supervisory Commission (FSC) announced today (28th) the approval for E.Sun Commercial Bank, along with six other 'too big to fail' banks—Hua Nan Commercial Bank, First Commercial Bank, Mega International Commercial Bank, Taipei Fubon Commercial Bank, Cathay United Bank, and CTBC Bank—to adopt the Internal Ratings-Based (IRB) approach for capital calculation. The implementation will begin in the fourth quarter of this year, with the Output Floor ratio to be gradually reduced over a five-year period. The market expects this to improve financial data, boost capital adequacy ratios, reduce pressure for capital increases, expand lending scale, and create greater room for future dividend distributions.

The IRB method uses internal rating models to more precisely assess probability of default (PD) and loss given default (LGD), enabling more accurate measurement of asset credit risk and required capital, while strengthening risk management capabilities.

The FSC began accepting applications from banks for the IRB method in the first half of 2024, with the aforementioned seven banks submitting applications. The FSC, together with the Joint Credit Information Center and the Central Deposit Insurance Corporation, established a dedicated review task force. After undergoing preliminary review, re-review, on-site inspections, and a one-year pilot operation, a comprehensive evaluation was conducted on each bank’s risk management framework, internal rating systems, model development and validation, data quality, model governance, and actual operational performance. Based on the results, all seven banks met the conditions for IRB adoption and were therefore approved.

To ensure the robust and orderly implementation of the IRB method, the FSC has introduced the following supporting measures:

1. Transition Arrangement for Output Floor Ratio: While Basel III introduced the Output Floor requirement, it allows flexibility for national regulators. Considering the potential fluctuations in capital requirements as Taiwanese banks transition from the standardized approach to IRB, the FSC has adopted a five-year transition period. Starting from Q4 2026, the seven banks will be subject to a 95% Output Floor ratio, which will decrease by 5 percentage points annually, reaching the final 72.5% Output Floor ratio from Q4 2031 onward.

2. Continued Compliance with IRB Eligibility Thresholds: During the period of IRB-based capital calculation, the seven banks must continue to meet the eligibility criteria, including 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 and IRB approaches remain above 9.5%, 11%, and 13%, respectively (compared to the general statutory minimums of 7%, 8.5%, and 10.5%). Failure to meet these conditions will result in the temporary suspension of IRB-based capital calculation.

The FSC explained that this approval will encourage banks to further refine their credit risk modeling, validation, and data governance capabilities, and more effectively apply internal ratings in daily operations, supporting stable business growth and enhancing the overall competitiveness of Taiwan’s banking sector.

The FSC stated it will continue monitoring the financial and operational changes of the first group of banks after IRB implementation, as well as the broader impact on the banking industry, with the second batch of applications expected to open by the second half of 2027 at the latest.