Dealing with "too big to fail"

  • Print

Issues

Systemically important financial institutions (SIFI) are so important to a national economy (or the global economy) that preventing their collapse is deemed a necessary means of protecting the financial system. The dialogue at the moment is focussing on SIFIs in primarily advanced economies, and a group of even larger Global or G-SIFIs. As LICs are becoming increasing integrated into the global economy, this is therefore a critical issue that needs to be tracked. The present dialogue however misses the point that LICs too may have SIFIs of their own, whose failure could be disastrous to their economies and societies, and therefore the debate needs to be adapted to include LICs.

The FSB is addressing three sets of issues. They want first to identify who the SIFIs and Global SIFIs are (based on their activity, size, interconnectedness, substitutability, and complexity). The second is to design resolution tools and regimes that avoid loss to taxpayers, permit SIFIs to perform key deposit and payment functions, and have in place a “living will” on how to closedown if they reach the point of no return. The third addresses better supervision by BCBS (linked to its Basel III framework), IAIS and IOSCO, and stricter assessment by the IMF and World Bank.

Underlying this is the concern that SIFIs might move their investments or operations to another jurisdiction if they dislike the changes. This necessitates an internationally harmonised approach.

 

Progress and Next Steps (as of April 2011)

On identifying SIFIs and capacity to absorb losses:

  • BCBS had agreed a methodology to assist in assessing G-SIFIs
  • IAIS is drafting indicators for assessing the global systemic importance of insurers (final version due September 2011)
  • BCBS aimed to complete its study of the magnitude of additional loss absorbency for banks by June 2011 for FSB to make recommendations ahead of the G20 Summit (November)
  • The FSB Bail-in Working Group expected to finalise proposals by mid-2011
  • Public consultations will take place during the second half of 2011 before recommendations are finalised

On resolution tools and regimes:

  • The FSB Steering Group on Resolution was expected to deliver a draft report on “Key Attributes of Effective Resolution Regimes” by mid-2011, and a final version is end-2011
  • FSB will discuss draft proposals at its Plenary meeting in July 2011
  • The FSB Cross-border Crisis Management Group (CBCM) is monitoring the development of G-SIFIs recovery and resolution plans with the institution-specific Crisis Management Groups
  • CBCM is also developing “Essential Elements of Effective Recovery and Resolution Plans” and a framework for the assessment of resolvability of individual SIFIs
  • The FSB Bail-in Working Group was expected to report in mid-2011 on the characteristics that contractual and statutory bail-in should have to be effective
  • The BCBS Cross-border Bank Resolution Group (CBRG) was to report findings from its survey of existing national resolution regimes and tools by mid-2011
  • FSB will draw on the CBRG’s findings as one of the inputs for the elaboration of the Key Attributes
  • FSB will engage a public consultation during S2 2011 on its proposed measures before the recommendations are finalised and delivered to the November Summit

On supervisory intensity and effectiveness:

  • National supervisors and standard setters continue to address the recommendations set out in the FSB’s November 2010 report on “Intensity and Effectiveness of SIFI Supervision”.
  • National supervisors were to submit their self-assessments of mandates, powers, resources and independence against the Basel Core Principles (BCPs) in June 2011
  • IAIS members were to submit their self assessments against the revised Insurance Core Principles (ICPs) by March 2012
  • BCBS was to provide a draft report to the FSB Supervisory Intensity and Effectiveness (SIE) group in June on the changes national supervisors are making to improve their methods and techniques
  • Standard setters are tightening their core principles, implementation standards and assessment methodologies and criteria. The IAIS’s proposed changes to its ICPs are currently out for public consultation and are expected to be finalised in October 2011
  • BCBS will issue a consultative paper on revised BCPs in December 2011
  • IMF and World Bank will draft revisions to its assessment methodologies in September 2011
  • FSB will consider further steps by November 2011

 

Key contacts

 

References