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An ex-ante fund to meet the costs of financial failures would make it even harder for financial firms to fail and to impose the necessary disciplines on stakeholders and creditors, the IIF argues. An ex-ante tax would contribute to the persistence of moral hazard and weaken market discipline, the IIF Managing Director warns in his letter to the G20 officials meeting in Washington, proposing an ex-post arrangement limited to meeting the ‘narrower set of costs of firm failure’.
Rather than establishing an ex-ante levy on the financial sector, the regulatory conditions need to be developed in which no institution can be regarded as too systemic to fail, IIF says and calls for effective resolution mechanisms for resolving failing cross border firms.
The IIF therefore proposed a framework for cross border resolution which includes the following features:
Ø Institutions should be able to fail without using taxpayers’ money or creating systemic shocks
Ø Shareholders and unsecured creditors need to bear the costs of failure
Ø Creating special resolution regimes for financial institutions
Ø Set up a global framework to achieve effective cross border resolution
Ø Any funding should come from a range of relevant institutions, but there would be a need to avoid inequitable burdens on categories of firms.
See full letter is attached below.