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Too Big to Fail FSB Progress Report Unveiled Ahead of Russian G20

The Financial Stabiliy Board (FSB) unveiled a new report today at a press conference hosted by its chair Mark Carney, at his new home of the Bank of England (BoE), entitled Progress and Next Steps Towards Ending “Too Big To Fail. The regulatory update ahead of the G20 meeting in St Petersburg, Russia, on 5-6 September this week, provides an update for the world leaders' attending the summit and an overview of what still needs to be done to complete the post-crash regulatory agenda to ensure that no bank is ever in future 'too big to fail'.

The FSB report makes it plain that more needs to be done via national legislation, regulation and, crucially, better international co-operation to ensure that the “too big to fail” problem of banks having to be bailed out in the event of a crash to protect the economy is eliminated.

The progress report is intended to help G20 leaders gathering in St Petersburg, Russia, this week understand the status of the body’s policy framework for reducing the moral hazard posed by systemically important financial institutions (SIFIs) - particularly the resolution regimes being introduced to ensure that if, god forbid, there was another Lehman Brothers-like collapse a more orderly wrap-up could be followed this time around.

Mark Carney, speaking in his capacity as chair of the FSB at today's BoE-hosted press conference, made it plain that he believes international bodies need to co-operate more to complete the policy initiative to end the ‘too big to fail’ problem, adding that he beleives: "We are now moving from developing powers to the practical [implementation] stage.”

In particular, Carney called for jurisdictions to:

• Undertake the legislative reforms that are necessary to implement the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’. This is the international standard for FI resolution regimes adopted in November 2011 and should be in force by 2015 argues the FSB report. It needs to be implemented by then across all parts of the financial sector that could cause systemic problems, including systemically important insurers and financial market infrastructures (FMIs), such as central counterparties (CCPs).
• Empower domestic authorities to share information and cooperate fully.
• Take legislative action as necessary to make resolution effective in a cross-border context.
• Address impediments to resolvability that arise from complexities in firms’ legal, financial and operational structures [i.e. the drive for a common legal entity identifier (LEI) and so forth -Ed].
• Consider complementary domestic structural measures that help promote financial stability and improve the resolvability of FIs without posing unnecessary constraints on the integration of the global financial system or creating incentives for regulatory arbitrage.
• Implement policy measures for domestic systemically important banks [as the UK, for instance, has done with its Vickers report -Ed].
• Ensure that supervisors have the capacity to resource themselves and the independence to meet their mandate.

"The initiative to end 'too big to fail' is ambitious, but essential for a more robust, competitive and fair financial system," said 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."

By Neil Ainger