I. Definition of Systemically Important Financial Institutions (SIFI)
Systemically Important Financial Institutions or SIFI refers to the gigantic institutions which cannot be failed or go bankruptcy as it is too big to fail. It is basically because those institutions influence on so many parts of the world and people living there. As it can bring an enormous chaos if those institutions fail, governmental authorities are compelled to pour money on them when those institutions are insolvent.
Due to this financial crisis compatible with the Great Depression in the 1920s in the United States, a number of investment banks such as Merrill Lynch or Lehman Brothers despite the governmental aid. Because of this outbreak, not only the United States but also other countries around the world especially the ones dependent on foreign trade were heavily damaged. In response to this, the countries belonged to G20 consented that specific global and national economic regulations are definitely needed. That is the reason why the heads of the G20 countries and International organizations including FSB (Financial Stability Board, founded to solve this financial crisis). At this conference, standards for national and global SIFIs and detailed supervision plans were also confirmed.
Classification of SIFIs
SIFIs are divided into two groups. One is global SIFIs which are big in size and affecting the world not only its home country and the other is national SIFIs. Specifically, Global-SIFIs are to be designated by FSB (Financial Stability Board) and National-SIFIs are to be designated by each countries’ own financial authorities.
To distinguish G-SIFIs from various financial institutions, BCBS (Basel Committee on Banking Stability) introduced MPG( Macroprudential Supervision Group). This method is to estimate systemic importance. By estimating systemic importance, the committee buckets the financial institutions into several groups according to quantitative measures (asset size, interconnectedness and substitutability) and qualitative measures (resolution regime and supervisory system). Then, different policies or regulations are applied to each bucket. This method is called Bucketing approach.
All SIFIs (Global + National)
|– Higher loss absorbency capacity with application to G-SIFI initially- Effective resolution framework- Intensive supervision- Robust core financial market infrastructures to reduce contagion risk
– Supplementary prudential regulations by national authorities
|– Development of Recovery and Resolution Plans – Firm-specific cooperation agreement for X- border resolution- Peer Review Council(PRC) to monitor implementation|
Ⅱ. Detailed Regulations Confirmed at G20 Seoul Summit
Enhancement of Loss Absorbency Capacity
All SIFIs, but G-SIFIs are charged with higher loss absorbency capacities. FSB and BCBS are still investigating level or magnitude of additional loss absorbency required for G-SIFIs but, general features of regulations are capital surcharge, contingent capital and bail-in-debt instruments.
Those measures are decided to be taken as the G20 countries and International Organizations such as IMF or FSB expected that banks would be reluctant to lend money or reduce the amount of the capital allocated for loans. This might result in reduced risk weighted assets.
Arrangement of Cross-Border Resolutions
Some of the events happened to multinational financial institutions during the crisis were especially complicated to solve because there were no resolution tools or consensus between the institution’s home country and host country. The measures taken were not firmly organized and tended to be ad hoc.
Thus, the BCBS suggested recommendations to strengthen national resolution powers and cross-border implementation. By suggesting guidelines, the BCBS hopes that this measure would limit the market impact of a bank failure and reduce contagion by supporting the use of risk mitigation mechanisms such as collateralization practices.
Reinforcement of Supervision and Financial Infrastructure
International standards or laws regarding OTC(Over the counter) derivatives or main risks of SIFIs will be improved or revised. OTC derivative will be supervised by CCP(Central Counter Party) as sellers and buyers have to trade through CCP. All OTC derivatives should be reported to trade repositories and clearing of settlement will also be done by CCP. Domestic financial authorities would examine its implementation by the end of 2011.
III. Status quo
There is only a slight possibility that Korean financial institutions are classified as G-SIFIs. Thus, Korean government will consider whether to apply SIFI regulation proposal after examining it. Financial Services Commission already had a Task Force (TF) meeting at the start of this year and is trying to lay a bill in this year.
|Contents of the bill regarding measure taken at G20|
|1. Legislation of definition of SIFI and its designating procedure.|
|2. Examination of soundness regulation on SIFI.|
|3. Establishment of cross-border resolution policy.|
|4. Solidification of supervision system on SIFIs.|
On 18th and 19th in February this year, a G20 conference for financial prime ministers was held. At this conference, it was initially intended to designate G-SIFIs but could not reach an agreement. Once a financial institution is designated as a G-SIFI, this institution has to be supervised and controlled by global authorities. Add to this, problems regarding liquidity or domestic real economy downturn could be ensued. So, there are controversies over setting boundaries for SIFIs though SIFI supervision could bring financial stability and reduce chance of any economic crisis or loss.
More or less 20 financial institutions are to be designated as G-SIFIs in this summer. When the list of SIFIs is confirmed and regulation plans are in effect, global financial market would be stable as the financial institutions would not compete unreasonably.
So young Lee (email@example.com)