Featured Product

    FSB Report Identifies Gaps in Too-Big-To-Fail Reforms

    June 28, 2020

    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. 


    Related Links

    Comment Due Date: September 30, 2020

    Keywords: International, Banking, Too Big to Fail, TBTF, Systemic Risk, D-SIBs, G-SIBs, Resolution Framework, FSB

    Featured Experts
    Related Articles

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News

    ECB Publishes Guide on Management of Climate and Environmental Risks

    ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.

    November 27, 2020 WebPage Regulatory News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News

    APRA Updates Reporting Standards and Guidance for EFS Data Collection

    APRA published the updated reporting standards and guidance for the collection of Economic and Financial Statistics (EFS), following a consultation process. Also published was a response letter to the feedback received on the proposal for amending the EFS reporting standards and guidance.

    November 24, 2020 WebPage Regulatory News

    EC Consults on Criteria for Environmentally Sustainable Activities

    EC is consulting on a draft delegated regulation to supplement the Taxonomy Regulation (2020/852) by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as environmentally sustainable.

    November 20, 2020 WebPage Regulatory News

    IFRS Examines Incorporation of Climate Risk Issues into IFRS Standards

    The IFRS Foundation published material highlighting the ways in which existing requirements in IFRS standards require companies to consider climate-related matters when their effect is material to the financial statements.

    November 20, 2020 WebPage Regulatory News

    FSB Report Outlines Progress on Interest Rate Benchmark Reform

    FSB published a progress report on the implementation of reforms to major interest rate benchmarks, including the London Inter-bank Offered Rate (LIBOR) benchmark.

    November 20, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6167