Finish the Job on Financial Regulation

IMF Blog, January 23, 2014

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Author: José Viñals
Date: January 23, 2014
Context: Call for completing the global financial regulatory reform agenda launched five years ago; emphasis on G-20 summit in Brisbane and the role of international standard setters and the IMF.

“The design of these rules is largely complete, and the focus is now shifting to the nitty-gritty of their implementation by countries.”
Key achievements cited:
- Basel III regulations making banks more resilient by requiring higher and better capital and liquidity.
- Intensified supervision and additional capital requirements for global systemically important banks, on top of Basel III levels.
- Requirements in key economies (United States, the European Union, and Japan) for systemically important institutions to prepare “living wills” to facilitate resolution and minimize taxpayer involvement.
- National measures to reduce banks’ size and complexity: Volcker rule (United States), Vickers reform (United Kingdom), and forthcoming European Union regulation based on the Liikanen proposals.
Notable laggard: accounting standards reform “stuck in low gear for too long.”

Central concern: expectation that governments will stand behind systemically important financial institutions, creating an implicit public subsidy that lowers funding costs, encourages excessive risk taking, and can lead to taxpayer-funded bailouts.
Quoted emphasis: “Too-big-to-fail was a major part of the source of the crisis. And we will not have successfully responded to the crisis if we don’t address that problem successfully.” — Ben Bernanke
Current gaps:
- Implicit subsidies to systemically important financial institutions “remain too large.”
- IMF working on new analysis of implicit subsidies to these institutions to be published in April.

Main point: one key unfinished element is bank resolution, particularly across borders; many countries remain ill-equipped for a Lehman Brothers-style bankruptcy with assets and liabilities across jurisdictions.
Recent progress examples:
- Agreements on the European Union’s bank recovery and resolution directive and the planned European single resolution mechanism.
- Continuing implementation of the United States’ Dodd-Frank legislation.
- Agreement in principle by officials in the United States and the United Kingdom to address cross-border resolution.
Cross-border exposure note: biggest U.S. banks “hold almost 70 percent of their on and off-balance sheet foreign assets in the United Kingdom.”
Specific unresolved tasks:
- Remove legal obstacles to cross-border resolution in areas such as derivatives and national insolvency regimes.
- Reach agreement on the amount, nature, and location of “bail-in-able” bank debt available to absorb losses.
- Build an unprecedented level of trust among officials in different countries through strong cooperation and uncompromising implementation of agreed reforms to avoid ring-fencing and balkanization of global finance.

Immediate priorities for policymakers:
- Complete the remaining elements of the G-20 reform agenda, with particular focus on addressing too-important-to-fail through effective resolution regimes.
- Remove legal obstacles to cross-border resolution (derivatives, insolvency regimes).
- Agree on rules for “bail-in-able” bank debt (amount, nature, location).
- Build mutual trust and cooperation among national authorities to support cross-border resolution and prevent ring-fencing.
Role of international actors:
- G-20 leaders should continue to support the Financial Stability Board’s work and have the political will to implement agreed reforms.
- The IMF will contribute resources and expertise, collaborate with the Financial Stability Board and international standard setters, and assist members through surveillance and technical assistance.
Short-term milestone: the G-20 summit in Brisbane as the focal point to finalize and implement the reform agenda.

Source: Finish the Job on Financial Regulation — José Viñals, January 23, 2014