Info Service on Finance and Development (Nov11/01)
Geneva, 4 Nov (Kanaga Raja) - The Financial Stability Board (FSB) on Friday announced an integrated set of policy measures with respect to systemically important financial institutions (SIFIs), as well as identified an initial group of 29 global SIFIs for which the resolution-related requirements will need to be met by end-2012.
The implementation of this set of policy measures and the time-line for their implementation were endorsed by the G20 Leaders at their Cannes Summit (3-4 November), said FSB.
According to an FSB press release, the specific measures focus on global SIFIs to reflect the greater risks that these institutions pose to the global financial system.
The FSB policy measures are set out in the following documents: "Key Attributes of Effective Resolution Regimes for Financial Institutions", FSB, October 2011; "Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement", BCBS, October 2011; and "Intensity and Effectiveness of SIFI Supervision", FSB, October 2011.
Mr Mario Draghi, Chairman of the FSB, said: "G20 endorsement of the policy measures marks a major milestone. Full and consistent implementation of these policies will lower the probability and impact of SIFI failure, and address moral hazard risks by enabling financial institutions at the core of the global system to be resolved without disrupting the real economy and imposing costs on taxpayers."
(In a separate press release, FSB said that it has appointed Mr Mark Carney, Governor of the Bank of Canada, as its new Chairman succeeding Mr Draghi. It has also appointed Mr Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, as its Vice-Chairman. The appointments are each for a three-year term beginning on 4 November. Mr Draghi, former Governor of the Bank of Italy, become President of the European Central Bank on 1 November.)
In a communication that announced the set of policy measures to address global SIFIs, FSB noted that at recent Summits, G20 Leaders asked the FSB to develop a policy framework to address the systemic and moral hazard risks associated with systemically important financial institutions.
In Seoul last year, G20 Leaders endorsed this framework and the time-lines and processes for its implementation.
The development of the critical policy measures that form the parts of this framework has now been completed. Implementation of these measures will begin from 2012, and full implementation is targeted for 2019, said FSB.
It emphasised that SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.
"To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances."
Addressing the "too-big-to-fail" problem, the FSB said, requires a multi-pronged and integrated set of policies.
Accordingly, the policy measures that have been agreed comprise:
(i) A new international standard, as a point of reference for reform of national resolution regimes, setting out the responsibilities, instruments and powers that all national resolution regimes should have to enable authorities to resolve failing financial firms in an orderly manner and without exposing the taxpayer to the risk of loss ("FSB Key Attributes of Effective Resolution Regimes");
(ii) Requirements for resolvability assessments and for recovery and resolution planning for global systemically important financial institutions (G-SIFIs), and for the development of institution-specific cross-border cooperation agreements so that home and host authorities of G-SIFIs are better prepared for dealing with crises and have clarity on how to cooperate in a crisis;
(iii) Requirements for banks determined to be globally systemically important to have additional loss absorption capacity tailored to the impact of their default, rising from 1% to 2.5% of risk-weighted assets (with an empty bucket of 3.5% to discourage further systemicness), to be met with common equity;
(iv) More intensive and effective supervision of all SIFIs, including through stronger supervisory mandates, resources and powers, and higher supervisory expectations for risk management functions, data aggregation capabilities, risk governance and internal controls.
In early 2012, said FSB, stronger international standards for core financial market infrastructures will be finalised to reduce contagion risks when failures occur.
The G-SIFIs to which the resolution planning and additional loss absorption requirements will apply will be determined, in the case of banks, by the FSB and BCBS (Basel Committee on Banking Supervision) based on the methodology that has been developed by the BCBS.
Using the BCBS methodology, the FSB said that it and BCBS have identified an initial group of 29 globally systemically important banks. These G-SIFIs will need to meet the resolution planning requirements by end-2012. National authorities may decide to extend these resolution planning requirements to other institutions in their jurisdictions.
(According to an annex to the FSB communication, the G-SIFIs, for which the resolution-related requirements will need to be met by end-2012, and listed in alphabetical order, are: Bank of America, Bank of China, Bank of New York Mellon, Banque Populaire CdE, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Dexia, Goldman Sachs, Group Credit Agricole, HSBC, ING Bank, JP Morgan Chase, Lloyds Banking Group, Mitsubishi UFJ FG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Societe Generale, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group, and Wells Fargo.)
According to FSB, the group of G-SIFIs will be updated annually and published by FSB each November. The methodology and the data used by it will be publicly available so that markets and institutions can replicate the authorities' determination.
The additional loss absorbency requirements will initially apply to those banks identified in November 2014 as globally systemically important using the BCBS methodology. They will be phased in starting in January 2016 with full implementation by January 2019. These banks must also meet the higher supervisory expectations for data aggregation capabilities by January 2016.
The FSB said that it and BCBS have assessed the macroeconomic impact of higher loss absorbency requirements for G-SIFIs. The enduring global economic benefits of greater resilience of these institutions far exceed the modest temporary decline of GDP over the implementation horizon. (See SUNS #7236 dated 11 October 2011.)
The FSB underscored that consistent implementation will be critical to the effectiveness of these policy measures.
"Legislative changes will be required in many jurisdictions to implement the FSB Key Attributes of Effective Resolution Regimes and to strengthen supervisory mandates and capabilities. Other requirements will demand a high degree of active cooperation amongst authorities and reviews and changes by firms of their structures and operations."
An FSB Peer Review Council, working with other bodies as appropriate, will review the full and consistent implementation of the G-SIFI measures and changes to national resolution regimes. The FSB, with the involvement of the IMF, the World Bank and the standard setters, will draw up a methodology to assess implementation of the Key Attributes standard.
According to the communication, the FSB and the BCBS will also begin work this year to define the modalities to extend expeditiously the framework to all SIFIs.
It noted that the International Association of Insurance Supervisors (IAIS) is expected to complete its assessment methodology for identifying globally systemically important insurers in time for the G20 Summit in June 2012.
The IAIS will also pursue its work to develop a Common Framework for the Supervision of Internationally Active Insurance Groups by 2013, in order to foster group-wide supervision and global convergence of regulatory and supervisory approaches.