Sunday, January 12, 2014

Int’l Accords Needed on Resolution Regimes for Failing SIFIs says German Central Banker

The cross-border consistency of orderly resolution regimes for failing systemically important financial institutions is extremely important in order to end too big to fail and avoid regulatory arbitrage, said Andreas Domfret, a member of the Deutsche Bundesbank executive board.. In remarks at a Euro Finance seminar in Frankfurt am Main, he noted that the new international agreements on resolution regimes developed by the Financial Stability Board are a crucial step. Applying these agreements globally will make the orderly resolution of a systemically important financial institution a more realistic option and thus also a more credible threat.
The FSB set out the key attributes of effective resolution regimes for global financial institutions. The key attributes, which have been endorsed by the United States and other G20 countries, set out the core elements considered to be necessary to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms that make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims.
In addition to the FSB initiative, intensive work is being carried out at the European level on the implementation of these principles. For example, negotiations on the European Recovery and Resolution Directive are scheduled for completion by the end of this year. Recently, E.U. Commissioner for the Internal Market Michel Barnier said that completion of the Directive by year-end was possible only if all Member States make compromises. No Member State will get everything it wants in an ideal world, noted the Commissioner.

In Germany, the Bundestag adopted a restructuring act in 2010 which anticipated the European rules. That was followed with the passage of the Act to Strengthen German Financial Supervision in 2012. The legislation embodies a new resolution regime. and also higher capital requirements, or the obligation to trade derivatives via central counterparties, which all represent a distinct improvement on the situation before the failure of Lehman Brothers.

These are all key first steps, noted Mr. Domfret, but they are not enough to make the financial system a safer place. What is needed next is to shape and transpose the new resolution rules agreed by international regulators and authorities consistently across national borders and sectors alike. While conceding that this will not be a simple matter in practice, the central banker emphasized that it is the only way to create a level playing field, prevent regulatory arbitrage, and contain the too-big-to-fail risks.

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