THE global
financial services giants are beginning to realize that they cannot
expect bail-outs from any future crisis at the tax payers' expense.
This
is one of the key messages of a report from the Basel-based Financial
Stability Board (FSB) submitted to G20 Leaders at their two-day St
Petersburg Summit in Russia.
The
report captioned ‘A Narrative Progress Report on Financial Reform'
says: “Firms and markets are beginning to adjust to authorities'
determination to end too-big-to-fail, with signs of reduced expectations
of taxpayer support both in credit rating agency ratings given to SIFIs
and in the market prices of their credit.”
It
notes: “Following the collapse of Lehman Brothers and the subsequent
public rescue of many large banks, G20 Leaders called on the FSB to
propose measures to address the problems associated with systemically
important financial institutions (SIFIs). The “too-big-to-fail” problem
arises when a SIFI's threatened failure forces public authorities to
bail it out to avoid large-scale financial instability and long-lasting
economic damage. The resulting public absorption of private losses
distorts incentives, leading to excessive risk-taking by SIFIs, and can
be ruinous for public finances.”
The
report says that substantial progress has been made in developing and
implementing policies to end too-big-to-fail, as detailed in a separate
report prepared for this Summit. FSB is identifying SIFIs in different
sectors, and applying three types of measures to sharply reduce the
threat that their failure poses to the wider system: 1) changes to legal
and operational regimes to enable all financial institutions, including
those operating across borders, to be resolved safely and without
taxpayer loss if they fail; 2) requirements that SIFIs have higher loss
absorbency to provide greater protection, given the greater economic
impact of their failure compared with institutions that are smaller and
less central to the system and 3) more intensive and effective
supervisory oversight (including sharing of risk data) to reflect the
additional complexity of these institutions and the systemic risks they
pose.
Listing
initiatives taken to s trengthen the confidence of all stakeholders in
an open, global financial system, the report says “Short-term incentives
to protect domestic economies and taxpayers can sometimes appear to
outweigh the longer-term benefits of a global system. The depth of the
crisis and the accompanying dislocation of cross-border activities
reinforce that bias. Fragmentation of the international financial system
could reduce growth by putting up barriers to the efficient allocation
of capital and liquidity in the real economy. Reforms that strengthen
confidence in the resilience of national and global financial systems,
including the prospects for economic growth, and that prevent regulatory
arbitrage, will reduce the risk of contagion between jurisdictions in
our integrated global financial system and help to mitigate incentives
to protect and ring-fence national systems. It is vital therefore that
we continue to demonstrate our common commitment to complete the
financial reforms.”
The
other documents submitted by FSB to G20 Summit are: a letter from the
FSB Chairman to the G20 Leaders; an overview report on progress in the
implementation of the financial reforms in order to strengthen financial
stability and a “scoreboard” status report that assesses the current
state of progress made in global policy development and implementation
of financial regulatory reforms.
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