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Systemically Important Financial Institutions (SIFIs) and
Global Systemically Important Financial Institutions (G-SIFIs)
from the Basel iii Compliance Professionals Association (BiiiCPA)
 
Global systemically important banks: Assessment methodology and the additional loss absorbency requirement, BIS - Rules text, November 2011
 
www.g-sifis.com/Global_Systemically_Important_Financial_Institutions_G_SIFIs_November_2011.html
 

 
The Financial Stability Board (FSB) released a list of 29 banks that it considers global systemically important financial institutions (G-SIFISs) at the G-20 Cannes summit on November 4.
 
The initial list of G-SIFIS

Belgium:
Dexia

China:
Bank of China

France:
Banque Populaire, BNP Paribas, Crédit Agricole, Société Générale

Germany:
Commerzbank, Deutsche Bank

Italy:
Unicredit

Japan:
Mitsubishi, Mizuho, Sumitomo Mitsui

Netherlands:
ING

Spain:
Santander

Sweden:
Nordea

Switzerland:
Credit Suisse, UBS

UK:
Barclays, HSBC, Lloyds, Royal Bank of Scotland

US:
Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, Wells Fargo
 

 
What is a SIFI and what is a G-SIFI?

SIFIs stand for Systemically Important Financial Institutions (SIFIs)
G-SIFIs stand for
Globally operating Systemically Important Financial Institutions

According to the Financial Stability Board (FSB), Systemically Important Financial Institutions (SIFIs) are firms whose disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.
 
Too often, because we have lacked the tools and the capacity to co-ordinate resolution across borders, we have answered the threatened failure of such firms by bailing them out using taxpayer funds.

The FSB has proposed (and the G20 leaders endorsed in Seoul in November 2010) a policy framework, work processes and timelines for addressing the systemic and moral hazard risks associated with SIFIs.

The framework calls for action in five areas:

First, and foremost, improvements to resolution regimes to ensure that any financial institutions can be resolved without disruptions to the financial system and without taxpayer support.

Second, a requirement that SIFIs and initially in particular global SIFIs (G-SIFIs) have additional loss absorption capacity beyond the Basel III standards to reflect the greater risks that these institutions pose to the global financial system.

Third, more intensive supervisory oversight for financial institutions which may pose systemic risk.

Fourth, stronger robustness standards for core financial infrastructure to reduce contagion risks from the failure of individual institutions.

Fifth, peer review by an FSB Peer Review Council of the effectiveness and consistency of national policy measures for G-SIFIs, beginning by end-2012.

G-SIFIs will be subject to a sustained process of mandatory recovery and resolution planning that will assess their resolvability under applicable resolution regimes.

Where resolvability is not assured, authorities should have the powers, exercisable under clear criteria, to require financial institutions to make the changes to their legal and operational structure that ensure there resolvability.
 

 
Global systemically important banks: Assessment methodology and the additional loss absorbency requirement, BIS - Rules text, November 2011
 
www.g-sifis.com/Global_Systemically_Important_Financial_Institutions_G_SIFIs_November_2011.html
 


Increasing the loss absorption capacity of SIFIs
 
The new bank capital and liquidity framework will have a positive impact on reducing risks at SIFIs.

However, these measures are primarily aimed at ensuring that all banks have sufficient loss absorption capacity to meet the risks arising from their own exposures, and not at protecting the system from the negative externalities created by SIFIs.
 
For this reason, the FSB, in collaboration with the BCBS, is developing a well-integrated approach that is more specifically focused on SIFIs.

The IMF, FSB, and Bank for International Settlements (BIS) submitted a paper to the G20 Finance Ministers and Central Bank Governors in November 2009 discussing the formulation of guidelines on how the national authorities can assess the systemic importance of financial institutions, markets, or instruments.

The paper outlines conceptual and analytical approaches to the assessment of systemic importance.

Leveraging on this, work is underway at the BCBS on a methodology to assist the FSB and the national authorities in assessing the systemic importance of financial institutions at a global level, focusing on their size, interconnectedness and substitutability.

The International Association of Insurance Supervisors (IAIS) will also conduct similar exercises for the insurance sector.

Drawing on relevant qualitative and quantitative indicators, the FSB and national authorities, in consultation with the BCBS, Committee on the Global Financial System (CGFS), Committee on Payment and Settlement Systems (CPSS), International Organisation of Securities Commissions (IOSCO) and IAIS, will determine by mid-2011 those institutions to which the FSB recommendations for financial institutions that are clearly systemic in the global financial system (G-SIFIs) will initially apply.

For these institutions, based on the nature and degree of risks they pose to the global financial system, an additional degree of G-SIFI loss absorbency and the instruments through which this additional loss absorbency can be met will be recommended by December 2011.

Depending on national circumstances, this higher loss absorbency could be drawn from a menu of viable alternatives and could be achieved by a combination of capital surcharges, contingent capital and bail-in debt.
 
In some circumstances, the FSB may recognise that further measures, including liquidity surcharges, tighter large exposure restrictions, levies, and structural measures could reduce the risks or externalities that a G-SIFI pose.

A Peer Review Council (PRC) will also be established, comprising senior members of the relevant national authorities having G-SIFIs operating as home and host in their jurisdictions, with the aim of assessing whether the measures are being applied consistently on a country-by-country basis and commensurate with the risk posed on a G-SIFI by G-SIFI basis.

The PRC will report annually to the FSB.
 


Improving the intensity and effectiveness of SIFI supervision
 
Measures are also being considered to enhance the intensity and effectiveness of supervision especially for SIFIs.

The FSB, in consultation with the IMF, has developed and submitted to the G20 Finance Ministers and Central Bank Governors in October 2010 recommendations for enhanced supervision based on lessons learned from the supervisory experiences during the crisis.

At present, not all supervisors have adequate mandates, independence and appropriate resources to carry out their supervisory duties to oversee banks’ activities. In some cases, supervisory authorities lack powers to carry out early interventions.
 
The FSB recommendations set forth actions needed to resolve these issues.

Improving coordination and cooperation amongst supervisory agencies in the oversight of the most important global financial firms is crucial.

Progress has been made with supervisory colleges now in operation for all the large, complex financial groups that the FSB has identified as needing colleges.

The BCBS issued a paper in October 2010, Good Practice Principles on Supervisory Colleges, setting out eight principles which aim to promote and strengthen the operation of supervisory colleges.

Meanwhile, in May 2010, IOSCO published a report Principles Regarding Cross-Border Supervisory Cooperation which sets forth mechanisms to improve cross-border supervisory cooperation amongst securities regulators.
 


Improving the capacity to resolve firms in crisis
 
Any effective approach to addressing the moral hazard risk posed by SIFIs needs to have effective resolution regimes at its base.

Such resolution regimes should make it feasible for any financial institution – including globally operating SIFIs (G-SIFIs) – to be allowed to fail without systemic disruptions and without taxpayer losses.

Three complementary sets of actions, each of them necessary, should be adopted to address the issues posed by SIFIs.

We need

(i) effective resolution regimes and tools;

(ii) a framework for cross-border coordination; and
 
(iii) sustained recovery and resolution planning to ensure that SIFIs are at all times resolvable.

The FSB will set out by mid-2011 criteria for assessing the resolvability of SIFIs which should be taken into account in determining the systemic risk of a G-SIFI and the key attributes of effective resolution regimes, including the minimum level of legal harmonisation and legal preconditions required to make cross-border resolutions effective.

The work will draw on available principles and recommendations and be undertaken in close cooperation with the BCBS Cross-border Bank Resolution Group (CBRG), IMF, IOSCO, and IAIS.

In
March 2010, the BCBS issued its final Report and Recommendations of the Cross-border Bank Resolution Group which set out recommendations falling into three categories:
 
strengthening national resolution powers and their cross-border implementation;
 
firm-specific contingency planning; and
 
reducing contagion.

A number of G20 jurisdictions have adopted legislation or are considering legislation that responds to the CBRG recommendations, including by adopting effective national resolution powers and a framework for coordinated resolution of financial groups within their jurisdictions.

In June 2010, the IMF published its proposals for improving coordination in the resolution of cross-border banks.

The IAIS has also initiated work to develop a supervisory paper on crisis management and cross-border resolution of insurance companies.

The FSB will also review restructuring mechanisms, including a statutory or contractual basis for “bail-ins”, debt-to-equity conversions and other innovative tools that can potentially provide for loss absorption by equity holders and creditors to determine their practical, financial, and legal feasibility and market capacity.

The FSB will also examine the viability of such mechanisms in national and cross-border contexts.

Such mechanisms require that a robust insolvency resolution regime be in place.

Impediments to the effective resolution of a G-SIFI derive from major differences in national resolution regimes and an absence of agreements for joining up home and host regimes in cross-border resolution.

Therefore, the FSB recommends that jurisdictions should provide resolution authorities with the legal capacity to cooperate and to share information across borders.

For each G-SIFI, there should be institution-specific cooperation arrangements between relevant home and host authorities.

The FSB will monitor progress in the establishment of these arrangements.

Under the guidance of the FSB Cross-border Crisis Management Group (CBCM), the major cross-border financial institutions and their national authorities have, over the past year, undertaken to produce
recovery and resolution plans (RRPs).
 
While work on RRPs is not complete – and indeed needs to be an ongoing undertaking – the work on RRPs and related discussion amongst home and host authorities have been a productive beginning.

The FSB recommends that RRPs that assess an institution’s resolvability be mandatory for all G-SIFIs.

The CBCM has identified practices in four technical areas that pose significant impediments to effective resolution.

These relate to:
 
booking practices;
 
the use of intragroup guarantees;
 
global payments operations; and
 
information systems.

All involve complexity in the structure of cross-border financial institutions, particularly the use of multiple legal entities in the execution of transactions and in the conduct of overall business.

The CBCM has begun to explore options to address these problems and will report by end-2011 on practical measures taken to improve resolvability, addressing obstacles associated with booking practices, global payments, intra-group guarantees and information systems.
 

 
Developments at the national and regional level

Efforts to address the moral hazard risk posed by SIFIs are also undertaken by national and regional authorities.

1. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was enacted in July 2010. Under the Dodd-Frank Act, the FSOC was established with the remit to identify emerging systemic risks and to improve regulatory coordination among the relevant agencies.

The Dodd-Frank Act introduces a new framework for the resolution of nonbank financial companies that are determined to be systemically important.

While the Dodd-Frank Act provides for firms to be designated as systemically important by the FSOC, the determination that a firm is systemic and should be resolved under Title II of the Dodd-Frank Act would occur near the time of failure through a recommendation by two-thirds of the Board of Governors of the Federal Reserve and two-thirds of the Board of the Federal Deposit Insurance Corporation (FDIC) to the Secretary of the Treasury, who in consultation with the President would make a determination to appoint the FDIC as receiver for the failing firm.

The regime provides the FDIC with powers that are similar to the powers the FDIC has as receiver of a failed bank. Specifically, the FDIC has the power to provide loans or guarantees to help stabilise the company.

The FDIC also has the power to sell the assets or operations of the company; to transfer the company’s assets, liabilities and operations to a “bridge” financial institution established by the FDIC; and to impose losses on shareholders and creditors.

2. In the EU, the European Commission is currently preparing proposals for the establishment of an EU-wide crisis management framework.

The second Communication on a new EU framework for crisis management in the financial sector was published in October and will be followed by a legislative proposal in June next year.

3. In the UK the special resolution regime (SRR), a statutory toolkit for resolving failing banks and building societies, was established by the Banking Act of 2009.

The SRR contains three tools to resolve a failing bank or building society:

i) transfer all or part of a failing bank’s business (including the deposits) to a private sector purchaser;

ii) transfer of some or all of a failing bank’s business to a bridge bank – a company owned and controlled by the Bank of England – with a view to a future private-sector sale; and

iii) a power for the Treasury to take the failing bank into temporary public ownership.

The UK Government is currently considering what improvements may be required to enhance safeguards and overall effectiveness of the regime in the context of proposed changes to the UK’s regulatory architecture.

4. In Germany, a recent draft Act for the Restructuring and Orderly Resolution of Credit Institutions provides Germany’s Federal Financial Supervisory Authority (BaFin) with a range of resolution powers, including the powers to transfer all, or part, of its business to an existing entity or a temporary bridge bank.

5. In Switzerland, the special resolution regime is currently being reviewed in order to close gaps identified during the financial crisis.

Key amendments will be the introduction of a bridge bank authority and a strengthened legal basis for the conversion of debt into equity (debt-equity swap).

In addition, the recognition of foreign insolvency procedures will be facilitated. Finally, the special resolution regime, which so far has applied to banks and securities dealers, will also apply, with certain amendments, to insurance undertakings.

6. Japan has necessary resolution regimes based on the Deposit Insurance Law, etc.

In principle, as a resolution without making deposit insurance payments, resolution is carried out through selected financial administrators or Bridge Bank System (transfer of insured deposits to the assuming financial institutions and implementation of financial assistance to those institutions).

And in the case where there is a risk that the failure of a financial institution will cause a significant adverse effect on the maintenance of stability of the financial system, special resolution is carried out through measures to deal with crisis, including capital injection, protection of total amount of certain liabilities, such as deposits, and temporary nationalisation according to the financial condition of the financial institution.

7. The Central Bank of Brazil is currently analysing responses to the 2009 public hearing of a legislative proposal, including a law of preventive measures to be taken by the central bank in order to reduce the probability of failure of financial institutions and facilitate their orderly resolution. It reorganises the deposit insurance agency and allows the central bank to grant loans to them as well as to institutions which work as central counterparts.

8. In China, the Peoples Bank of China (PBC) is now working on establishing a clearly-layered risk resolution and payment arrangement for SIFIs; strengthening responsibilities of institutions, shareholders and creditors; quickening the establishment of deposit insurance mechanisms; and giving full play of its supportive role as the central bank.



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