Systemically important financial institutions (SIFIs) are institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. At the Seoul Summit in 2010, the G20 Leaders endorsed the FSB-framework for reducing the systemic and moral hazard risks posed by-SIFIs.
The implementation of the FSB SIFI framework requires, as a first step, the assessment of the systemic importance of financial institutions at a global level (or G-SIFIs). The framework recognises that SIFIs vary in their structures and activities, and that systemic importance and impact upon distress or failure can vary significantly across sectors. It requires that the FSB and national authorities, in consultation with the standard-setting bodies, and drawing on relevant indicators, determine which institutions will be designated as G-SIFIs. The assessment methodologies to identify G-SIFIs need to reflect the nature and degree of risks they pose to the global financial system. To date, assessment methodologies have been developed for global systemically important banks (G-SIBs) and insurers (G-SIIs).
The assessment methodologies for identifying NBNI G-SIFIs published today for public consultation complement the methodologies that currently cover banks and insurers. While the consultative document proposes specific methodologies for the identification of NBNI G-SIFIs, it does not designate any specific entities as systemically important or propose any policy measures that would apply to NBNI G-SIFIs. In the report Progress and Next Steps Towards Ending "Too-Big-To-Fail" published in September 2013, the FSB explained that policy measures will be developed once the methodologies are finalised.
In developing the methodologies, the FSB and IOSCO based their work on the following principles:
The overarching objective in developing the methodologies is to identify NBNI financial entities whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the global financial system and economic activity across jurisdictions.
The general framework for the methodologies should be broadly consistent with methodologies for identifying G-SIBs and G-SIIs, i.e. an indicator-based measurement approach where multiple indicators are selected to reflect the different aspects of what generates negative externalities and makes the distress or disorderly failure of a financial entity critical for the stability of the financial system (i.e. "impact factors" such as size, interconnectedness, and complexity).
The FSB and IOSCO welcome comments on this document. Comments should be submitted by 7 April 2014 by email to email@example.com or post (Secretariat of the Financial Stability Board, c/o Bank for International Settlements, CH-4002, Basel, Switzerland). All comments will be shared with IOSCO and be published on the FSB and IOSCO websites unless a commenter specifically requests confidential treatment.
Mark Carney, Chairman of the FSB, stated that "Today's proposals are an essential first step towards addressing the risks to global financial stability and economic stability posed by the disorderly failure of financial institutions other than banks and insurers. They are integral to solving the problem of financial institutions that are too big to fail."
Greg Medcraft, Chairman of the IOSCO Board and a member of the FSB Plenary, stated that "The development of assessment methodologies for identifying NBNI G-SIFIs is challenging as it needs to capture the wide range of business models and risk profiles in the non-bank non-insurer financial space while maintaining broad consistency with the overall SIFI framework. This public consultation will help us to better understand the market intermediaries and investment funds whose failure pose systemic risks. I look forward to industry views."
Further reporting © Bloomberg
Fitch: FSB's Nonbank SIFI Rules Will Have Narrow Impact
The proposed methodology for the identification of non-bank, non-insurance financial institutions that pose systemic risks to the global economy appears unlikely to affect a large number of institutions, according to Fitch Ratings. Fitch sees little or no future impact from the SIFI designation framework among the largest firms in the US, where the number of institutions with assets exceeding the $100 billion threshold is very small.
Aside from Goldman Sachs and Morgan Stanley, already designated as global SIFIs, no other securities firms are expected to meet the proposed size and complexity standards outlined by the FSB. With respect to the asset management sector, the FSB proposal appears to be primarily focused at the fund level, which appears different from a prior comment by the US Treasury Department's Office of Financial Research (OFR), which focused on systemic risk at the asset management company level. That said, the FSB will explore whether the focus should apply more broadly at the fund family or asset manager level.
Fitch estimates that there are only 14 US funds that would exceed the threshold, and thus attract additional examination of their potential systemic importance. However, if the focus is at the asset manager level, the number of US firms that could potentially be impacted would be materially higher. Regardless of whether the focus is ultimately on asset management companies or their funds under management, there will likely be active discussion among regulators and market participants as to the extent to which either introduces systemic risk or simply transmits the views and acts of their investors.
In Fitch's view, regulated open-end and closed-end funds do not present a significant source of systemic risk based on the indicators the FSB cited as potential signals of heightened systemic risk. Regulated open-end funds do not use excessive leverage, net counterparty exposures are minimal, and, for most asset classes, substitutability does not appear to be an issue. Regulated closed-end funds use leverage, but it is limited and subject to tight regulatory constraints under the Investment Company Act of 1940. On the other hand, certain large and leveraged hedge funds could pose broader systemic risk in times of market stress and are an appropriate area of focus.
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