a man on a precipice

Efforts to reduce the hazards posed by banks deemed “too big to fail” have improved the resilience of the financial system. Yet, a review by the Financial Stability Board (FSB) finds that there’s still room for improvement.

The FSB has published an evaluation of the reforms that were adopted in response to the global financial crisis — in an effort to prevent future taxpayer bailouts of large, systemically-important banks that are considered too large, or too important, to be allowed to fail.

The new report found that the world’s big banks have been made more resilient, and also more easily resolvable, as a result of post-crisis reforms. Those included higher capital demands and tougher supervisory requirements for big banks, and measures to make it easier to wind up a failing bank.

“Indicators of systemic risk and moral hazard moved in the right direction, suggesting that market participants view these reforms as credible,” the FSB said, adding that bank resilience has been tested by the Covid-19 pandemic, too.

Banks have largely weathered the pandemic, but the FSB noted that this crisis has also been met with unprecedented fiscal, monetary and supervisory support measures.

Additionally, the report pointed to various areas that still need improvement, including “further work to enhance the resolvability” of systemically-important banks; enhancing public disclosure; and assessing the potential impact of resolution actions on the financial system and economy.

The FSB also said that the application of the reforms to domestic systemically-important banks requires further monitoring, as do rising shadow banking risks.

“Having robust banks and a mechanism to resolve them in the event of failure is key to maintaining financial stability,” said Claudia Buch, vice-president of the Deutsche Bundesbank and chair of the group that produced the FSB report.

“While the evaluation highlights the progress we have made, more can be done to fully realize the benefits of these reforms,” Buch said. “I look forward to further work by the FSB and standard-setting bodies to close the gaps we have identified.”