FSB published, for consultation, a report on evaluation of the too-big-to-fail (TBTF) reforms for systemically important banks. The evaluation examines the extent to which the reforms are reducing the systemic and moral hazard risks associated with systemically important banks, in addition to the broader effects of these reforms on the financial system. The consultation report also identifies the gaps in the resolution framework that still need to be addressed. Estimates of the social costs and benefits of the TBTF reforms and a Resolution Reform Index were also published. The response period for this consultation ends on September 30, 2020 while the final report is expected to be published in early 2021.
The findings of the report suggest that TBTF reforms contributed to the resilience of the banking sector and its ability to absorb, rather than amplify, shocks. The reforms have made banks more resilient and resolvable. Major banks are much better capitalized, less leveraged, and more liquid than they were before the global financial crisis. Systemically important banks in advanced economies built up significant loss-absorbing and recapitalization capacity by issuing instruments that can bear losses in the event of resolution. Many FSB jurisdictions have introduced comprehensive bank resolution regimes and are carrying out resolution planning. This gives authorities a wide range of options for dealing with banks in stress, though the selection of options for use is up to the individual authorities, in light of the particular circumstances. Resolution planning and enhanced supervision have significantly improved the operational capabilities of banks and authorities, as well as the accuracy and detail of the information available to them.
Overall, the benefits of the reforms significantly outweigh the costs and no material negative side effects of the reforms have been observed. The report does not make specific policy recommendations; however, the evaluation identified gaps that still need to be addressed:
- The evaluation identified a number of areas where improvements to the resolvability of systemically important banks could still be made. These involve total loss-absorbing capacity (TLAC) implementation, resolution funding mechanisms, the valuation of bank assets in resolution, operational continuity and continuity of access to financial market infrastructure, and cross-border coordination.
- State support for failing banks has continued. Only three systemically important banks have been resolved in recent years. However, public funds continue to be used to support small or medium-sized banks, even in jurisdictions with well-developed resolution frameworks. Since the few recent bank failures are characterized by very different circumstances, it is hard to draw broad conclusions, but there have been a number of cases of state support.
- There are opportunities to improve provision and availability of data and to consider the adequacy of current levels of transparency. The report suggests opportunities to enhance the credibility of reforms by enhancing disclosures of information related to the operation of resolution frameworks; the resolvability of systemically important banks, including TLAC; and the details of resolution actions after the event. There may also be gaps in the information available to public authorities and to FSB and standard-setters, which reduces their ability to monitor and evaluate.
- The application of the reforms to domestic systemically important banks (D-SIBs) warrants further monitoring. Compared to G-SIBs, relatively little is published by national authorities and at the international level about D-SIBs’ characteristics or the regulations to which they are subject. More information and analysis, potentially drawing on the analytical tools developed in this evaluation, could be used to compare prudential measures for these institutions and explore how the reforms have been applied to them.
- Risks arising from the shift of credit intermediation to non-bank financial intermediaries should continue to be closely monitored. The evaluation has not examined the implications for non-bank financial intermediaries, but the findings on the banking sector reinforce the importance of continuing work by FSB and standard-setting bodies to assess vulnerabilities and develop policy recommendations designed to address related financial stability risks.
The TBTF reforms being evaluated have three components: standards for additional loss absorbency through capital surcharges and total loss-absorbing capacity requirements; recommendations for enhanced supervision and heightened supervisory expectations; and policies to put in place effective resolution regimes and resolution planning to improve the resolvability of banks. The evaluation, which was conducted before the onset of the COVID-19 pandemic, draws on a broad range of information sources and is based on numerous empirical analyses and extensive stakeholder feedback. FSB has also published a technical appendix to the evaluation, which provides the detailed empirical evidence for the conclusions reached. The TBTF reforms were endorsed by G20 in the aftermath of the 2008 global financial crisis and have been implemented in FSB jurisdictions over the past decade.
- Press Release
- Consultation Report (PDF)
- Technical Appendix (PDF)
- Resolution Reform Index (XLSX)
- Social Costs and Benefits (XLSX)
Comment Due Date: September 30, 2020
Keywords: International, Banking, Too Big to Fail, TBTF, Systemic Risk, D-SIBs, G-SIBs, Resolution Framework, FSB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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