Financial experts generally agree that risks associated with liquidity, credit, quality, fiscal and monetary policies can all create systemic vulnerabilities. Without a central federal regulator to look across financial institutions, markets and products to see where risks may be building up, the threat of systemic risk remains elevated.
As a follow up to the G20 Seoul Summit in November, 2010, which called for a new financial regulatory framework, The Financial Stability Board (FSB), in conjunction with the Basel Committee on Banking Supervision, proposed certain recommendations on how to reduce the potential hazard posed by Globally Systemically Important Financial Institutions (G-SIFI).
As part of the process, the FSB asked for comments on its proposal, regarding the designation of G-SIFIs, non-bank SIFIs, the cross border resolution of G-SIFIs and capital liquidity, and loss absorbing long term debt requirements and heightened prudential standards for those firms, such as recovery and resolution planning, stress testing and single counter-party credit limits. This is a package of proposed policy measures intended to improve the capacity of relevant authorities to resolve G-SIFIs without systemic disruption and exposing taxpayers to the risk of loss as well as a timeline for their implementation. The Basel Committee on Banking Supervision has also asked for comments on its, Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirements. These proposed series of reforms are intended to improve the resilience of banks and banking systems and mitigate the potential negative impacts created by G-SIFIs which current regulatory polices do not fully address.
In the U.S. the Financial Stability Oversight Counsel (FSOC) designates bank and non-bank SIFIs and looks across financial institutions, markets and products to see where risks may be building up in the banking, securities, and insurance markets utilities and infrastrucutre which support these industries. The Federal Reserve Board acts as the supervisor of these entities after designation. The FDIC has primary responsibility for the resolution of domestic and global SIFIs in the U.S. The Office of Financial Research acts as the FSOC's data collection, and data standard setting body and analyzes this data for the FSOC on a regular basis.
A systemic risk regulator will examine all systemically important financial institutions, and scrutinize any activity that may have wide-reaching effects on the whole market, and intervene to contain risks that threaten the broader system. This regulator should participate in an internationally coordinated effort to improve the current system's regulations, promoting the system's ability to provide healthy lines of credit to global markets.
One of the biggest gaps exposed in the U.S. regulatory system during the financial crisis was the lack of a federal resolution authority to reliably wind down failing institutions. That's why SIFMA supports the creation of a comprehensive resolution authority that can wind down any failing, systemically important financial institution in a way that preserves financial market stability, and complementary reforms to the bankruptcy code.