United Kingdom

Details

  • Service: Advisory, Risk Consulting
  • Industry: Financial Services
  • Type: Business and industry issue
  • Date: 28/11/2011

G20 Summit: Tightening the regulatory noose on systemically important firms 

Although dominated by the Eurozone problems, the November G20 summit demonstrated the determination of the authorities to press ahead with a second wave of major regulatory reforms, building on the tougher capital and liquidity standards already agreed in the Basel 3 package.

The G20 agreed a package of measures for global systemically important financial institutions (G-SIFIs), including:

 

  • Capital surcharges on global systemically important banks (G-SIBs). The Financial Stability Board (FSB) published the initial list of 29 banks currently considered to be of global systemic importance based on previously published criteria.

 

  • Recovery and resolution planning (RRPs):
    • A requirement on global systemically important financial institutions (G-SIFIs) to have credible recovery plans and for the authorities to be able to develop effective resolution plans for these institutions;
    • A common set of powers and tools that all national authorities should put in place to enable the smooth resolution of a SIFI without taxpayer costs, including the power to "bail in" debt as part of a resolution; but
    • Acknowledged limited progress on harmonised resolution regimes for major cross-border groups;
    • The FSB lay the ground work for these G-SIB principles to be extended to a wider set of non-bank financial institutions including insurers.
  • Effective supervision of SIFIs: the FSB reinforced the need for more intensive supervision of SIFIs, and emphasized the role of robust data and information systems.


The G20 also endorsed the progress made by the Financial Stability Board (FSB) and by international standard setters on:

 

  • Market infrastructure: the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO) are developing core principles to apply to all systemically important market infrastructures.

 

  • OTC and commodity derivatives markets: progress continues towards the standardisation, exchange trading, central clearing, reporting to trade repositories and higher capital requirements for OTC derivatives, but the end-2012 deadlines are unlikely to be met. The FSB acknowledged IOSCO efforts to set principles for regulation of commodities derivatives markets and in particular supported supervisory powers to manage and limit positions in this market.

 

  • Regulatory perimeter: work should continue on shadow banking, hedge funds, securitisation and exchange traded funds.

 

There was no agreement on the introduction of a global financial transactions tax, but the EU Commission looks likely to press ahead with the proposed EU Directive on the introduction of such a tax.

 

Implications for systemically important firms

 

  • For many SIFIs, this second wave of regulatory reforms will represent a tipping point. They will need to consider seriously the impact of these proposals on their strategies and business models. Significant changes may be required to preserve business value.
  • Capital surcharges and RRP requirements will be expensive for systemically important banks to meet, and will constrain balance sheet growth. Markets may put pressure for early compliance and some national regulators have already imposed, or proposed, additional buffers.
  • Although some policy-makers argue that that raising capital should become cheaper as banks become safer, the sheer volume of capital required to meet new standards is likely to push up its cost.
  • Some SIFIs may face high costs in making changes to their business activities, and to their legal entity and operational structures, to satisfy the authorities that a credible resolution plan can be constructed.
  • SIFIs will also face higher costs in developing and implementing contingency plans; in reporting recovery plans and resolution packs to the authorities; in creating a comprehensive, regularly updated and ring-fenced management information system to support resolution planning; and in establishing service level agreements that are legally enforceable in crises and in resolution.
  • SIFIs will also face additional demands from supervisors to meet the FSB's recommendations on the intensity and effectiveness of SIFI supervision, including on data aggregation, IT systems, and risk management capabilities.

 

To find out more, please contact Giles Williams, Partner, Global Financial Sector Risk and Regulator Centre of Excellence on giles.williams@kpmg.co.uk.