A new report from the Financial Stability Board (FSB) says that countries have made progress on efforts to end the “too-big-to-fail” status of big banks, but that more needs to be by regulators and legislators to combat the problem.
The FSB report, which comes in advance of an upcoming G20 summit, finds that there are signs that firms and markets are beginning to adjust to policymakers’ efforts to reduce moral hazard in the financial system.
It says that, where effective resolution regimes are now in place, rating agencies give less credit for taxpayer support. And it sees signs that financial markets are revising down their assumptions of taxpayer support. “Market prices of credit default swaps for banks have become more highly correlated with equity prices, suggesting a greater expectation amongst participants that holders of debt will, if necessary, bear losses,” says the report.
This comes amid efforts to address moral hazard through the introduction of tougher capital requirements and greater oversight for systemically important firms; and, measures to strengthen core financial market infrastructure, such as central counterparties (CCPs), to address contagion risks, it says.
“However, more needs to be done through legislation, regulation and international agreements to end the ‘too-big-to-fail’ problem,” the report concludes.
It calls for further actions from the G20, the FSB, and other international bodies. In particular, it says that jurisdictions should undertake legislative reforms necessary to adopt effective resolution regimes for all parts of the financial sector that could cause systemic problems, including systemically important insurers and financial market infrastructure, such as central counterparties.
It says that domestic regulators should be empowered to share information and cooperate fully; that legislative action should be taken to make resolution effective in a cross-border context; and, that the authorities should address any impediments to resolution that arise from complexities in firms’ legal, financial and operational structures.
Additionally, it calls on countries to consider adopting: complementary domestic structural measures to promote financial stability, and improve the ability to wind up financial institutions; policy measures for domestic systemically important banks; and, to ensure that regulators have the capacity to resource themselves and the independence to fulfill their mandates.
The FSB says that it, and other international bodies, will support these actions by developing policies for: information-sharing mechanisms; the regulation of global systemically important insurers; and, approaches to prevent large-scale early termination of financial contracts during a resolution process.
“The initiative to end too-big-to-fail is ambitious, but essential for a more robust, competitive and fair financial system,” said FSB chair, Mark Carney. “While much has been accomplished over the past few years, more needs to be done. In particular, jurisdictions need to implement fully the internationally agreed policies through additional legislation and regulation; cross border co-operation agreements must be struck, and policies for gone- concern loss absorbing capacity should be developed.”