Ending Too-Big-To-Fail

Systemically important financial institutions (SIFIs) are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.

At the Pittsburgh Summit in 2009, G20 Leaders called on the FSB to propose possible measures to address too-big-to-fail (TBTF) problems associated with SIFIs. In 2010 at the Seoul Summit the G20 Leaders endorsed the FSB framework for reducing the moral hazard of SIFIs (the SIFI Framework).

The objective of the SIFI Framework is to address the systemic risks and the associated moral hazard problem for institutions that are seen by markets as TBTF. It does so by reducing the probability of SIFIs failing through implementation of a multipronged and integrated set of policy measures to address systemically important financial institutions consisting of:

• Requirements for additional loss absorption capacity to reflect the greater risks that G-SIFIs pose to the global financial system.
• More intensive and effective supervision, including through stronger supervisory mandates, resources and powers; rigorous coordinated assessment of the risks facing the G-SIFIs through international supervisory colleges; higher supervisory expectations for firms’ risk governance and internal controls frameworks, risk management functions, and risk data aggregation capabilities.
• An international standard that sets out the responsibilities, instruments and powers that all national resolution regimes should have to enable authorities to resolve failing financial firms in an orderly manner and without exposing the taxpayer to the risk of loss (FSB Key Attributes of Effective Resolution Regimes).

Requirements for resolvability assessments and for recovery and resolution planning, and for the development of institution-specific cross-border cooperation agreements so that home and host authorities of G-SIFIs are better prepared for dealing with crises and have clarity on how to cooperate in a crisis.

A peer-based resolvability assessment process to periodically review G-SIFI resolvability at the international level.

Strengthened core market infrastructures to reduce the potential for contagion arising from the interconnectedness of significant market participants and the limited transparency of counterparty relationships.