At their summit meeting early in September in St. Petersburg, the group of the 20 biggest industrial and developing countries (G20) assessed progress made in resolving the “too-big-to-fail” problem and at the same time initiated further measures to address remaining obstacles. The Financial Stability Board (FSB) and the international Standard Setters have been called on by the G20 to put forth proposals by the end of 2014 on how to better control the risks for the financial system.

Progress report of FSB

The FSB, which on behalf of the G20 has been developing a package of measures for dealing with systemically important financial institutions since 2010, had drawn up an overview of international progress made in addressing risks posed by those institutions. The development and implementation of the measures has been making headway in several areas, for example in the methodology for defining global systemically important banks (G-SIBs) and global systemically important insurers (G-SIIs), as well as in intensified supervision e.g. through the more stringent requirements to be met by internal risk control mechanisms and reporting. To increase their loss absorbency, global systemically important banks have meanwhile raised their common equity capital by about 500 billion US dollars. Market participants are exposed to a lower risk of contagion now that the measures for clearing of standardised Over–the-Counter (OTC) derivatives through central counterparties have been implemented. Despite this progress, the FSB is urging further efforts for containing systemic risks.

The FSB, which in 2011 created the basis for the recovery and resolution of systemically important financial institutions with its Key Attributes of Effective Resolution Regimes for Financial Institutions, also sees progress being made in this area after the assessment of a first peer review of national resolution regimes. By the end of 2013, the FSB will finalise the specific guidance for the insurance sector and market infrastructures designed as annexes to the Key Attributes. The FSB is calling on its members to fully implement the Key Attributes by 2015.

Definition: Too big to fail

Companies are said to be “too big to fail” if the cost of their failure for the economy would be greater than the cost of rescuing them. The Financial Stability Board (FSB) believes that currently 28 banks and nine insurance undertakings are so big that their collapse would pose a threat to the global financial system. The term “too big to fail” is also often used representatively for other aspects characteristic of systemic importance, such as “too complex to fail” and “too interconnected to fail”.

Further actions

In the banking sector, the focus of further work will shift from the G-SIBs to Domestic Systemically Important Banks (D-SIBs), specifically the development of the D-SIB frameworks. Given that in this area the national authorities have more discretion to take account of the structural peculiarities of their banking sectors, the FSB will be primarily concerned with making sure that the differences in the national frameworks do not lead to distortions in competition.

From 2019, G-SIIs will have to meet higher requirements in terms of their loss absorbency when pursuing certain, particularly systemically important activities. Since there is still no globally uniform capital framework, the International Association of Insurance Supervisors (IAIS), acting on behalf of the G20, will submit a proposal for straightforward backstop capital requirements for the next G20 summit meeting in 2014. That is then to serve as a basis for the development of a comprehensive supervisory and regulatory framework for insurance undertakings, including a quantitative capital standard.

In the view of the FSB, further actions also have to be taken for those global systemically important institutions that can neither be assigned to the banking nor to the insurance sector. By the end of 2013, the FSB will submit a methodology for identifying these institutions.

With a view to achieving closer and more effective supervision, the FSB is demanding that obstacles to the exchange of information in supervisory colleges and crisis management groups be removed and that the Data Gaps Initiative designed to facilitate exchange of information between supervisors be implemented by the end of 2014. In the meantime, a data hub has been established at the Bank for International Settlements (BIS) to which G-SIBs in future will report certain exposure data regularly and on the basis of common templates enabling the supervisory authorities to gain a better picture of how the institutions are interconnected amongst themselves.

Data Gaps Initiative

The Data Gaps Initiative, which came about at the behest of the G20, comprises 20 recommendations that the Financial Stability Board (FSB) and the International Monetary Fund (IMF) drew up on behalf of the G20 to close information gaps in the exchange of data between supervisory authorities discovered in the wake of the financial crisis.

EU Bank Recovery and Resolution Directive

The European Union, the European Banking Authority (EBA) and the German legislator have dealt with the Key Attributes to varying degrees.

In June 2013, the EU Council of Finance Ministers agreed on a proposal for a Directive for the recovery and resolution of credit institutions and investment firms. It is expected to be published at the end of 2013. The Member States must implement the Directive within twelve months of its entry into force. Until then, the EBA is expected to have also finalised the regulatory technical standards on the scenarios, scope and evaluation of the reorganisation plans. Drafts for such standards had already been issued by the EBA in the spring for public consultation.

For systemically important insurance undertakings, central counterparties and central securities depositories, the European Commission at the end of 2012 issued for public consultation a regulatory proposal for a recovery and resolution framework for financial institutions other than banks . Further regulatory actions are set to follow by the end of the year.

Implementation in Germany

Implementation of the FSB Key Attributes for the banking sector is also well advanced in Germany. Already on entry into force of the German Restructuring Act of 2011, the legislator had anticipated important aspects of the Key Attributes. In June 2013, the German Bundesrat then passed the Act on Ringfencing and Recovery and Resolution Planning for Credit Institutions and Financial Groups (Gesetz zur Abschirmung von Risiken und zur Planung der Sanierung und Abwicklung von Kreditinstituten und Finanzgruppen) (“Ringfencing Act”). Among other things it defines how recovery and resolution plans are to be drawn up, thus implementing a key aspect of the EU Bank Recovery and Resolution Directive already prior to its entry into force. Under the Ringfencing Act, BaFin is now authorised to remove obstacles to a financial enterprise’s resolvability. In the autumn of 2012, BaFin also released a draft circular for public consultation on the minimum requirements for the establishment of recovery plans (Mindestanforderungen an die Ausgestaltung von Sanierungsplänen – MaSan) which is expected to be finalised by the end of this year. Likewise, additional specific requirements for G-SIBs and D-SIBs have already been implemented nationally: for example, the basis for the capital buffer that G-SIBs and D-SIBs are required to hold from January 2016 to absorb higher losses has already been incorporated in the revised section 10 of the German Banking Act (Kreditwesengesetz – KWG).

Some of the key requirements of the FSB for strengthening financial market infrastructures have already been implemented nationally through the Ringfencing Act as well as the EU Regulation on OTC derivatives, central counterparties and trade repositories (EMIR).