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From Banking and Finance Law Daily, September 3, 2013

FSB calls for further action on TBTF

By John M. Pachkowski, J.D.

In advance of the upcoming G-20 Summit in St. Petersburg, Russia, the Financial Stability Board (FSB) has issued a report on the progress already made toward ending “too-big-to fail” (TBTF) and provided further actions that required from the G-20, the FSB, and other international bodies to complete the policy initiative to end “too-big-to fail.”

SIFI framework. The report entitled Progress and Next Steps Towards Ending “Too-Big-To-Fail” noted that “good progress” has been made in implementing the FSB’s 2011 framework for reducing the moral hazard posed by systemically important financial institutions (SIFIs). The framework addresses the “too-big-to-fail” issue by reducing the probability and impact of SIFIs failing. It comprises requirements for assessing the systemic importance of institutions, additional loss absorbency, increased supervisory intensity, more effective resolution mechanisms, and stronger financial market infrastructure.

The report added that “there are signs that firms and markets are beginning to adjust to authorities’ determination to end ‘too-big-to-fail,’ but cautioned that “more needs to be done through legislation, regulation and international agreements to end the ‘too-big-to-fail’ problem.”

G-20 action. The report calls on the G-20 Leaders to “renew their commitment to address TBTF” and provides six areas that should be address. They are: (1) a renewed commitment to the legislative reforms that are necessary to implement the Key Attributes of Effective Resolution Regimes for Financial Institutions by 2015 for all parts of the financial sector that could cause systemic problems; (2) remove obstacles to cross-border resolution; (3) improve the resolvability of firms’ structures and operations; (4) consider domestic structural measures that are complementary to an effective SIFI framework; (5) implement policy measures for domestic systemically important banks (D-SIBs); and (6) remove obstacles to supervisory effectiveness.

FSB future action. The report also provided five areas in which the FSB and other international bodies need to take further actions to ensure the TBTF problem is addressed and calls on G-20 countries to support these actions. The five areas are: (1) the design and implementation of information sharing mechanisms in coordination with relevant standard-setting bodies; (2) the preparation of proposals on the adequacy of G-SIFI loss absorbing capacity in resolution; (3) finalized regulation governing the supervision and resolution of global systemically important insurers (G-SIIs) ; (4) the development of proposals to prevent large-scale early termination of financial contracts in resolution; and (5) preventing regulatory arbitrage and a “race to the bottom.”

Mark Carney, Governor of the Bank of England and FSB’s Chairman noted, “The initiative to end too-big-to-fail is ambitious, but essential for a more robust, competitive and fair financial system. While much has been accomplished over the past few years, more needs to be done. In particular, jurisdictions need to implement fully the internationally agreed policies through additional legislation and regulation; cross border co-operation agreements must be struck, and policies for gone-concern loss absorbing capacity should be developed.”

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