On 16 February 2013, the finance ministers and central bank governors of the G20 published a communique following the closure of their meeting in Moscow on 15 and 16 February 2013. Amongst other things, the G20 confirmed that operational resolution plans for all global systemically important banks (G-SIBs) should be developed by the end of June 2013 and resolved to address all impediments to effective home-host cooperation of resolution authorities for internationally active banks.
The FT is reporting that the Federal Reserve and the Federal Deposit Insurance Corporation have warned banks which are required to produce Recovery and Resolution Plans (RRP) not to assume that regulators will co-operate to avoid the failure of a financial group. In contrast, they are being required to detail the types of legal filings, notices and applications they would need to submit in each jurisdiction to ensure co-operation among regulators and are being expected to describe the legislation in force within specific countries that would facilitate co-ordination.
If this is indicative of the likely response of authorities during a crisis, it would be a very worrying development indeed. It is in stark contrast to the FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”, published in October 2011. This sets the benchmark for national RRP regimes and requires the:
- establishment of Crisis Management Groups (CMGs) between home and key host authorities with the objective of facilitating the management and resolution of a failing cross-border G-SIFI; and
- creation of institution-specific cooperation agreements between home and host authorities to govern the development of RRPs and detail procedures concerning notification and consultation prior to an authority taking action against a failing firm.
Unfortunately, if authorities choose not to work together during a crisis, CMGs and cooperation agreements will count for nothing. Without regulatory co-operation, RRP has some residual value as a data-gathering exercise but will fail to meet its primary objective of facilitating the orderly resolution of a globally significant financial institution in a way that ensures continuity of critical economic functions and minimises taxpayer exposure. Will anyone tell the G20 that they risk being measured up for the Emperor’s new clothes before it’s too late?
On 5 November 2012, the Financial Stability Board (FSB) published a letter dated 31 October 2012 addressed to the G20 regarding progress made with respect to financial regulatory reforms.
The FSB reported ‘solid but uneven’ progress” in the four priority areas identified by the G20, being:
- building resilient financial institutions (i.e. Basel III);
- ending “too big to fail” (i.e. RRP);
- strengthening the oversight and regulation of shadow banking activities; and
- completion of OTC derivatives and related reforms.
On the subject on ending “too big to fail”, the FSB noted that a peer review of national actions taken to legislate its “Key Attributes of Effective Resolution Regimes” document will now be published in the first half of 2013. More importantly, however, on the subject of resolution planning for Globally Systemically Important Financial Institutions (G-SIFIs), the FSB confirmed that the deadline for completion of operational resolution plans for Globally Systemically Important Banks (G-SIBs) has been extended by six months until mid-2013. Consequently, the FSB’s peer-based resolvability assessment process will now be delayed until the second half of 2013.
Here is a link to an RRP Timeline. I hope that you find it useful.
The yellow flags highlight some of the events which resulted in the initial RRP initiative. The green flags represent the regulatory initiatives related to RRP, and the red flags show some of the deadlines that will apply to market participants affected by RRP legislation.
Apologies for the fact that it’s rather cluttered – there has been a lot happening with respect to RRP recently! However, I wanted to set a bit of a benchmark with the first timeline. Over time, I will update this, but focus more on future regulatory initiatives and deadlines and less on past events.
On 24 July 2012, the European Banking Federation (“EBF”) published a “Study on the issue of possible reforms to the structure of the EU Banking Sector”. The report is related to the ongoing work of the High Level Expert Group established by the EU Commission to examine the same issue.
The report distinguishes regulatory reform (such as CRD IV, RRP, EMIR and MiFID) from structural reform – a reference to the Vickers report in the UK and the Volcker rule in the US.
In general, the EBF is supportive of regulatory initiatives. However, on the subject of RRP, it cautions that “a reasonable balance must be struck between effective, robust supervision and supervisory approaches which are overly intrusive into the normal, day-to-day running of a healthy business”. The EBF also approves of the concept of “bail-in”, favouring a wide definition of bail-in-able debt so as to reduce the possibility of arbitrage and the need for a statutory minimum quantity of bail-in-able debt to be issued by firms. However, the EBF believes that the “timing and the implementation of any bail-in mechanism…must…avoid imposing an excessive funding cost that could impair the provision of credit to the real economy and result in an excessive deleveraging”.
The EBF believes that the objectives of the G20 and the EU are to:
- increase the stability of the European financial sector by reducing risk;
- ensure orderly resolution of financial institutions without taxpayer support; and
- maintain the integrity of the Internal Market and to ensure the ability of banks to serve the real economy.
It claims that all of these objectives can be achieved by the finalisation and implementation of the regulatory reform agenda without the necessity of structural reform. Citing the ECB’s report on EU Banking Structures, the EBF claims that “there is no convincing evidence that structural reform has a direct influence on systemic risk and would make restructuring or resolution easier in the event of a crisis.” Quite the opposite, it expresses the view that “the disadvantages deriving from a potential adoption of UK- or US- style structural reforms for the EU would be much larger than the eventual benefits that they would generate” due to the possibility that it will lead to fragmentation of financial markets in the EU and create incentives to circumvent the rules. As such, it concludes that any structural change should be delayed until the regulatory reform agenda has been completed so that its impact can be properly assessed.
The views of the EBF regarding the definition of bail-in-able debt are interesting. They accord with opinions expressed by the buyside, such as AIMA, and are undoubtedly correct. The more narrow the definition, the greater the risk that the protection afforded by bail-in debt will be rendered toothless at the structuring desks of investment banks around the globe.
The reluctance of the EBF to embrace structural change is understandable. Whilst the political benefits are clear and opinion both amongst regulators and the industry seems to be swinging behind these initiatives (see, for example, here), the economic case for reforms such as those proposed by Vickers has yet to be made definitively. Unfortunately for the banks, however, neither the UK nor the US governments seem to have a reverse gear where Vickers and Volcker are concerned.
If you have an hour to spare I would recommend that you read this study for no other reason than it provides an excellent review of the history and developments across the entire regulatory landscape within the EU.
Last week, the leaders of the G20 met in Los Cabos, to discuss, among other things, the progress of financial regulatory reform, a key aim of which is to address the issue of financial institutions which are ‘too-big-to-fail. The Financial Stability Board (“FSB”), tasked with overseeing this reform programme, published a report detailing progress in the implementation of the G20 recommendations.
The FSB report addressed three main areas:
- Improving the capacity to resolve firms in crisis;
- Improving the intensity and effectiveness of systemically important financial institution (“SIFI”) supervision; and
- Extending the SIFI framework.
Improving the capacity to resolve firms in crisis
The FSB Key Attributes of Effective Resolution Regimes for Financial Institutions outlines the essential elements of any resolution regime, highlighting the following requirements:
- the establishment of Crisis Management Groups (CMGs);
- the elaboration of recovery and resolution plans (RRPs);
- the conduct of resolvability assessments;
- the adoption of institution-specific cross-border cooperation agreements (COAGs); and
- the establishment of cooperation arrangements with jurisdictions that are hosts to systemic operations of a G-SIFI but are not represented on its CMG.
Crisis Management Groups and RRPs
The FSB reported that 24 out of 29 G-SIFIs have established CMGs, of which a few have discussed resolution strategies and ‘started to develop operational plans to implement them.’ However, the FSB concedes that, in many cases, the work of CMGs and the development of RRPs is restricted by the absence of ‘clearly articulated resolution strategies’, and has given priority to resolving this matter by the end of 2012.
The aim of a resolvability assessment is to highlight obstacles to resolution. Again, there is an acknowledgement that the development of resolution strategies is a precondition of effective resolvability assessments. The FSB concludes that such assessments should be conducted from Q1 2013, after the development of the necessary resolution strategies.
Institution-specific cooperation agreements
The FSB report states that no institution-specific cooperation agreements have been agreed to date. This is due, in part, to the lack of developed resolution strategies and also due to the difficulties of sharing information across jurisdictions. Therefore, the FSB will examine obstacles to the exchange of information with a view to developing minimum common terms and content for information sharing to be included within cooperation agreements by early 2013.
Cooperation with Non-CMG host jurisdictions
The FSB acknowledges that channels of communication need to exist between a CMG and host authorities that are not represented in the CMG, and proposes to develop further guidance on the matter.
Improving the intensity and effectiveness of SIFI supervision
More intense and effective supervision of SIFIs is posited as a key pillar of the FSB’s financial reform framework, and focuses on four key areas:
- Holding supervisors to higher standards;
- Improving supervisory tools and methods;
- Enhancing the effectiveness of supervisory colleges; and
- Improving firms’ risk data aggregation capabilities.
The consensus is that progress is being made in these areas, but that more work is needed. The development of uniform principles of banking supervision, (based on the BCBS’s Core Principles for Effective Banking Supervision) is underway, with a projected publication date of autumn 2012. Significantly, on the subject of improving supervisory tools and methods, the FSB concludes that ‘while resources at supervisory authorities have increased since the financial crisis, the pace of increase has not been commensurate with higher regulatory and supervisory demands.’ The report also highlights the relative lack of expertise across supervisory bodies, and the need to improve the risk measurement capabilities of supervisory colleges. Finally, the FSB is compiling guidelines concerning firms’ risk aggregation capabilities, to be published by the end of the year, with firms being expected to begin implementation in 2016.
Extending the SIFI Framework
Domestic Systemically Important Banks (“D-SIBs”)
At the 2011 G20 summit, it was proposed that the G-SIFI framework, addressing the issue of ‘too-big-to-fail’, should be extended to cover D-SIBs. Whereas the G-SIB framework considers the global impact of banking failures, by realigning the framework, it is hoped that the externalities of bank failure at the local level can be identified and addressed. The Basel Committee on Banking Supervision (“BCBS”), in collaboration with the FSB, is in the process of developing a D-SIB framework which is compatible with that of the G-SIB, facilitates home-host coordination and improves D-SIB loss absorbency. The findings of the FSB and BCBS will be presented to the G20 Finance Ministers and Central Governors meeting in November 2012.
Global Systemically Important Insurers (“G-SIIs”)
The report further notes that the International Association of Insurance Supervisors (“IAIS”) was tasked with the ‘development of an assessment methodology for the identification of G-SIIs’ and has made significant progress to this end, publishing a paper on policy measures that should apply to G-SIIs. A consolidated paper on the assessment methodology and the policy measures will be delivered to the G20 in April 2013, with an initial list of G-SIIs being produced soon thereafter. For more information on this aspect, please see the post on this blog entitled “Recovery and Resolution Plans for Globally Systemically Important Insurers by Mid-2014” dated 7 June 2012.
In recognition of the fact that non-bank G-SIFIs can also cause widespread disruption to the global financial system, G20 leaders asked the FSB, with the International Organisation of Securities Commission (“IOSCO”) to design a methodology for identifying such institutions. However, no date was given by which IOSCO is due to report.
On 20 June 2012, the G20 published its leaders’ declaration following the close of the Los Cabos summit. The declaration was wide-ranging, but on the subject of economic stabilisation and the global recovery, the G20 affirmed its support for the ‘consideration of a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance’ within the EU.
More specifically, the G20 also provided guidance on the future timetable for financial sector reform:
- reiterating its commitment to make national resolution regimes consistent with the FSB Key Attributes of Effective Resolution Regimes;
- supporting the ongoing development of recovery and resolution plans and institution-specific cross-border cooperation agreements for all G-SIFIs;
- reiterating its commitment to strengthen the intensity and effectiveness of the supervision of SIFIs and requesting the FSB to report on progress in this area in November 2012 at the G20 Finance Ministers and Central Bank Governors’ meeting;
- welcoming progress on the development of a common framework for the identification of, and policy measures relating to, domestic systemically important banks (D-SIBs);
- Requesting the FSB and the International Association of Insurance Supervisors (IAIS) to complete their work on identification and policy measures for global systemically important insurers by April 2013;
- looking forward to the preparation by the FSB and the International Organization of Securities Commissions (IOSCO) of methodologies to identify other systemically important non-bank financial entities by end-2012;
- calling on the Committee on Payment and Settlement Systems (CPSS) and IOSCO to continue their work on systemically important market infrastructures; and
- requesting the IAIS to continue its work to develop a common framework for the supervision of internationally active insurance groups by end-2013.
The full declaration can be found here.