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I am honoured to speak here as new Financial Stability Board (FSB) chair at this special
occasion.
Last month marked 10 years since the Key Attributes of Effective Resolution Regimes for
Financial Institutions were endorsed by G20 Leaders in Cannes as an international standard.
Developed in the aftermath of the 2008 Global Financial Crisis, as part of a sweeping reform
agenda, the Key Attributes were designed to tackle the problem of “too big to fail” financial
institutions. One of the lessons of the Global Financial Crisis was the need to establish effective
resolution regimes. This was necessary to ensure that the cost of a failure in a systemic financial
institution would not be borne by taxpayers.
The Key Attributes aim to achieve this goal -- that if a firm fails, it can be resolved without severe
disruption to the financial system and without exposing taxpayers to losses. To this end, the Key
Attributes set out a range of tools, aimed at providing authorities with sufficient powers and
control over the resolution of financial institutions. And they ensure a consistent approach to the
design of resolution regimes across jurisdictions and facilitate cross -border coordination in a
crisis.
As a result of the Key Attributes, a whole resolution infrastructure has developed over the past
10 years. This goes for the banking sector, as well as for insurers and CCPs, albeit at a less
advanced level in most jurisdictions. Today, in many countries designated resolution authorities
are in place that possess the necessary legal powers and operational capacity to intervene in
and resolve financial institutions that are no longer viable. For internationally active firms, crisis
management groups, underpinned by cross -border cooperation agreements, have been
established. Global systemically important financial institutions, or G-SIFIs, have established
Recovery and Resolution Plans. They have worked on removing barriers to resolvability. And
resolvability assessments are being conducted to evaluate the credibility and feasibility of
resolution strategies.
But, 10 years on, can we claim success? While the Key Attributes have been instrumental in
addressing the too-big-to-fail problem, the orderly resolution of a troubled G-SIFI has not yet
been tested. And new challenges may arise, either from the organic evolution of a firm’s business
or from external influences. So let me park the question about “success” for a moment.
Let us instead recall why the resolution reforms are so importan t. Prior to the Key Attributes,
authorities had to rely on general bankruptcy laws and insolvency liquidation that was completely
unsuitable for financial institutions. Particularly for those institutions that provide critical
economic functions that need to be maintained. These weaknesses in dealing with insolvent
financial institutions became very clear during the Global Financial Crisis. In September and
October 2008, I participated, as a senior aide to the previous governor, in the crisis management
meetings in Brussels to prevent the imminent collapse of Fortis, the former Belgian- Dutch
financial conglomerate. In retrospect, the issues we encountered during those days tick almost
every box of the Key Attributes. But the Key Attributes did not exist at t hat time, so we had to
improvise. For example, the authorities did not have the legal instruments to impose losses on
shareholders while keeping the conglomerate running. The existing framework for information
sharing and policy coordination between the home and host supervisors was flawed, to put it
mildly. And there was no pre-arranged plan for funding in the case of resolution. I remember that
once the agreement was struck about nationalisation of the Dutch parts of Fortis, the Dutch State
Treasury had to go to the market for €50 billion practically overnight. A large part of this was
needed to secure funding for Fortis Bank Netherlands. € 50 billion, that was almost one fifth of
our pre-crisis national debt. And I could go on. It could easily have become our European
Lehman-moment.
After the Global Financial Crisis, there was widespread agreement that we needed new
instruments to be able to let financial institutions fail in an orderly manner. But how to do it?
Making banks and insurers resolvable was an idea that – to most countries – was completely
new. How could we operationalise an idea that could work across widely different countries? An
idea that until then had only existed in people’s heads?
This is what has made the Key Attributes ground-breaking. They not only answered the
questions: what does an effective resolution regime look like? And what are its key building
blocks? They also provided the building instructions. Starting from the end goal and then working
backwards. Concrete enough to get to work, and high level enough so that it would be applicable
in widely different jurisdictions. In that way, it made the translation from the drawing board to
actual practice. That was an extraordinary achievement.
But perhaps the most important change the Key Attributes have brought about is that, apart from
setting a standard for resolution regimes, they also introduced a planning requirement. As US
President Eisenhower said, “plans are worthless, but planning is everything”. This is true for all
forms of crisis management. Resolution planning for systemic financial firms has been
instrumental in identifying and addressing a multitude of legal and operational issues that could
form an obstacle to orderly resolution. This has also greatly improved capabilities at firms and
other stakeholders to support resolution.
Making financial firms resolvable is a long process. The FSB’s Too-Big-To-Fail evaluation that
was completed earlier this year showed that implementation is very advanced in jurisdictions
that are home to banks designated as globally systemically important, more commonly known
as G-SIBs. But implementation could still be improved in jurisdictions that are not home to
G-SIBs. After all, other banks can also be systemic nationally or cross -border. And while
authorities and firms may now on paper be better prepared for a crisis, this also needs to be
tested through dry -runs and other means to gai n assurance. And external stakeholders may
need to also play their part if a firm were to be resolved. So, practical and operational cooperation
and communication deserve specific attention as part of this.
I guess the job will never be completely finished and it is not meant to be. Resolution planning
is an ongoing process that has become an indispensable complement to going concern
prudential supervision. Indeed, the FSB’s Resolution Report – published today – flags digital
innovation as an emerging challenge that will need be addressed in resolution planning. But,
returning, to my earlier question: in light of the very significant progress made, and conscious of
the work still to be done, I think it is altogether fitting that we celebrate this 10-year anniversary
as a success. We have come a long way.
That raises the question: what broader lessons does the story of the Key Attributes teach us?
How can we use these lessons from the past to meet the financial stability challenge we face
today?
In my view, the success of the Key Attributes was due to three things. First, a strong political
commitment across nations to take action on ‘too-big-to-fail’ as a problem that requires a global
solution. Second, bringing the key decision- and policymakers together to develop an analytically
sound and hands -on approach. And third, keeping track of implementation progress across
jurisdictions along the way and exerting peer pressure to ensure progress on a global scale.
The FSB, set up by G20 Leaders to develop and implement the post -2008 crisis reforms, was
the perfect organisation to perform that role. Its global and cross-sectoral membership, of central
banks, finance ministries, bank supervisors, market regulators and international organisations
brings together the key policymakers on global financial stability. It provides a unique forum to
forge consensus. It operates with active involvement of senior-level officials in a collegial spirit
of mutual trust. The FSB, through the G20 process, also provides for a strong link to political
decision makers, including the heads of state.
The FSB has played a vital role in bringing domestic and foreign regulators together to build the
capacity, trust, and communication necessary to make the effective resolution of systemic
financial institutions possible. In that sense, Tim Geithner was right when he said that the FSB
is the fourth pillar of the global architecture of cooperation alongside the IMF, World Bank and
WTO.
I’m convinced these three ingredients of success can also guide us in dealing with the new
challenges to global financial stability that we face today. Indeed, most new challenges fac ing
the global financial system cut across sectors and jurisdictions and cannot easily be classified
in the typical bank, insurance or securities buckets.
This has been evident in our work to address climate-related financial risks, where our roadmap
aims to support a consistent approach amongst authorities in the coming years.
It is also evident in our roadmap to enhance cross-border payments. Here we are working with
the Committee on Payments and Market Infrastructures and other relevant international
organisations and standard-setting bodies to address the challenges which affect cross-border
payments.
And, finally, on crypto assets and global “stablecoins”, the FSB has developed 10 high- level
recommendations that promote coordinated and effective regulation, supervision and oversight
of global “stablecoin” arrangements to address the financial stability risks posed by them, both
at the domestic and international level.
These challenges have one thing in common: they are global in nature. Therefore, they require
solutions that are globally adopted, and globally consistent. Yet, in order to be effective, these
global solutions have to take account of country-specific details when it comes to
implementation.
These are big challenges but compared to 10 years ago we have one big advantage. We can
rely on a framework of international cooperation that has been tested and proven to work. For
over a decade, the FSB has promoted and coordinated important financial reforms and it will
continue to do so in the future. So let’s continue our work in this spirit of international cooperation
and operational excellence that made the Key Attributes a success.