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    FSB Report Examines Success of Too-Big-to-Fail Reforms for Banks

    March 31, 2021

    FSB published the final report on evaluation of the effects of too-big-to-fail reforms for systemically important banks. The evaluation examines the extent to which the reforms have reduced the systemic and moral hazard risks associated with the systemically important banks and explores the broader effects of these reforms on the financial system. The evaluation revealed that the too-big-to-fail reforms have reduced moral hazard and systemic risk without material side-effects, though certain gaps still need to be addressed.

    The reforms within the scope of the evaluation include standards for additional loss absorbency through capital surcharges and total loss-absorbing capacity (TLAC) requirements, recommendations for enhanced supervision and heightened supervisory expectations, and policies for effective resolution regimes and resolution planning to improve the resolvability of banks. These reforms were endorsed by G20 leaders after the 2008 financial crisis, as part of a wider package of reforms intended to enhance global financial stability and support the economy. The evaluation found that the too-big-to-fail reforms have made banks more resilient and resolvable. Indicators of systemic risk and moral hazard risks have moved in the right direction, suggesting that market participants view these reforms as credible. Increased bank resilience and greater market discipline have been tested by the COVID-19 pandemic. So far, banks have been able to absorb the shock. The evaluation of too-big-to-fail reforms have identified the following development areas:

    • Resolution reforms should be implemented in full to enhance the feasibility and credibility of resolution, thus minimizing the need for state support of failing banks. This includes further work to enhance the resolvability of systemically important banks.
    • Scope exists for improvement of public disclosures of information on resolution frameworks and funding mechanisms, the resolvability of systemically important banks, and other resolution-related actions.
    • Information may be needed for public authorities to assess the potential impact of resolution actions (such a bail-in) on the financial system and the economy.
    • Application of these reforms to the domestic systemically important banks warrants further monitoring.
    • Risks arising from the shift of credit intermediation to non-bank financial intermediaries should also continue to be closely monitored.

    Closing these gaps should continue to be a priority in the current environment. There is still a high degree of uncertainty about the evolution of the pandemic and the economic outlook as well as their effects on the financial system. Non-financial firms have taken on additional debt. A deterioration in the credit quality of these non-financial borrowers could increase the likelihood of loan defaults, causing losses for banks. Having robust banks and a mechanism to resolve them in the event of failure is key to maintaining the stability of the financial system. This final report reflects public feedback received on a consultative version of the report, which FSB published in June 2020. It contains analytical updates using market data covering the period since the outbreak of COVID-19 as well as more extensive description of issues raised during the consultation.

     

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    Keywords: International, Banking, Too Big to Fail, Basel, Bail In, Systemic Risk, TLAC, G20, Regulatory Capital, D-SIBs, FSB

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