FSB Evaluates Efficacy of Too-big-to-fail Reforms

The evaluation found that the TBTF reforms have made indeed banks more resilient and resolvable, but barriers to bank resolvability still need to be addressed.

The FSB (Financial Stability Board) has published for public consultation an evaluation of TBTF (too-big-to-fail) reforms for systemically important banks.

Encompassing standards for loss absorbency, enhanced supervision, and bank resolution, the TBTF reforms were endorsed by the G20 in the aftermath of the 2008 global financial crisis and have been implemented in FSB jurisdictions over the past decade.

The latest evaluation examines the extent to which the reforms are reducing the systemic and moral hazard risks associated with systemically important banks, as well as their broader effects on the financial system.

The evaluation found that the TBTF reforms have made indeed banks more resilient and resolvable, with better capitalisation and loss-absorbing capacity. “The capital ratios of global systemically important banks have doubled since 2011,” the FSB said.

Further, many FSB jurisdictions have introduced comprehensive bank resolution regimes and are carrying out resolution planning, giving authorities a wide range of options for dealing with banks in stress.

“Resolution planning, together with enhanced supervision, have significantly improved the operational capabilities of banks and authorities, as well as the accuracy and detail of the information available to them,” the report says.

The evaluation also found that the benefits of the TBTF reforms significantly outweigh the costs, and “represent a net benefit for society”. Material negative side effects have not been observed, and other market participants have stepped in to fill the gaps where large banks have reduced their activities. The evaluation also found no evidence of increased market fragmentation as a result of the reforms.

The FSB found, however, that there are still gaps that need to be addressed, i.e. remaining obstacles to bank resolvability, a continued reliance on state support for failing banks, and inadequate reporting and disclosures of information, among others.

The consultation report, available here, is open for comment until 30 September 2020. The final report is expected to be published in early 2021.

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