Trade groups advise on 'too big to fail'

New York, NY and Washington, DC, September 6, 2011–In a letter responding to the Financial Stability Board’s (FSB) Consultative Document on Effective Resolution of Systemically Important Financial Institutions (SIFIs), the major players in the global financial services industry expressed strong support for the FSB’s overall objective, namely that authorities in all relevant jurisdictions should have the capacity to resolve SIFIs without systemic disruption and without exposing the taxpayer to the risk of loss, within a reasonable timeframe. In addition, the Associations strongly urged the FSB to undertake peer reviews to ensure consistency and coordination of implementation among jurisdictions.

In particular, the trade groups commend the FSB’s efforts to begin the systematic work of assembling a single comprehensive and cohesive package of policy measures to improve the capacity of authorities to resolve SIFIs within and across national borders. An asymmetric global framework, in which some nations have established clear protocols that promote orderly resolution without taxpayer support while others lack such clarity could be destabilizing during a financial crisis and encourage regulatory arbitrage. The groups also commend the FSB for focusing on the resolution process and regulatory actions in resolution so that the process and actions are clear, transparent and predictable to the market well in advance of stress on any individual firm or the financial market generally.

“We believe that a global regulatory consensus on these issues is critical, that the FSB’s and the G-20’s cooperation is necessary to achieve such consensus, and that their further support will be essential in order to translate the proposed policy measures into legislative action,” the Associations say in the letter. “We urge the member countries of the G-20 to make the legislative actions recommended by the Consultative Document a stated priority, and encourage such legislative actions to be explicitly added to the implementation timeline. We also urge the FSB to conduct and publish a meaningful peer review of the degree to which countries comply with its final recommendations, as well as publish annual peer reviews to assess progress toward full implementation.”

The letter was filed by the Global Financial Markets Association, The Clearing House Association, the American Bankers Association, The Financial Services Roundtable, the Institute of International Bankers, and the Institute of International Finance.

In response to the specific recommendations in the FSB’s Consultative Document, the trade associations address recommendations for effective resolution regimes, agreeing with the need for special national resolution regimes for SIFIs to be used as a last resort after the failure of all other measures reasonably designed to prevent a SIFI from becoming nonviable. The associations also agree that these special resolution regimes should be designed to preserve the continued performance of the systemically important and other functions of a SIFI whose going concern values are higher than their liquidation values.

The Associations offer suggestions for structuring cross-border SIFI resolution regimes on both a national and international level and recommend, to the extent possible, that regulators coordinate and standardize their approach to key resolution issues in order to facilitate planning and to avoid the creation of inefficiencies or overly burdensome regulation.

The Associations also address recommendations for Recovery and Resolution Plans, with particular emphasis on issues relating to cross-border cooperation, confidentiality, resolvability assessments, and implementation timelines. In particular, the groups oppose discriminatory depositor preference laws that discriminate against foreign deposits or foreign depositors because such discrimination will be an impediment to cross-border resolutions of G-SIFIs. Instead, foreign and domestic deposits, and foreign and domestic depositors, should be treated as a single class in any depositor preference law.

The Associations also view the various recommendations made in the Consultative Document as interconnected, and urge regulators and national authorities to proceed with their implementation in light of this interconnectedness. For example, resolvability assessments depend in part on the progress of institution-specific cross-border cooperation agreements and recovery and resolution planning related to cross-border exposures, and the timeline should reflect such dependencies. In addition, a number of transition issues with regard to the implementation of the timeline in the Consultative Document will need to be addressed.

The full comment letter is available here: http://www.gfma.org/pdf/GFMA-Joint-Trade-FSB-SIFI-Resolution-Response.pdf

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