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Evaluation of the Effects of Too-Big-To-Fail Reforms: Consultation Report

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Evaluation of the Effects of Too-Big-To-Fail Reforms: Consultation Report Evaluation of the effects of too-big-to-fail reforms Consultation Report 28 June 2020 The Financial Stability Board (FSB) coordinates at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Its mandate is set out in the FSB Charter, which governs the policymaking and related activities of the FSB. These activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations under the FSB’s Articles of Association. Contact the Financial Stability Board Sign up for e-mail alerts: www.fsb.org/emailalert Follow the FSB on Twitter: @FinStbBoard E-mail the FSB at: [email protected] Copyright © 2020 Financial Stability Board. Please refer to the terms and conditions Table of Contents Preface .................................................................................................................................. 1 Questions for Consultation .................................................................................................... 2 Executive Summary .............................................................................................................. 4 1. Introduction ....................................................................................................................10 2. Reforms and their implementation .................................................................................11 2.1. The problem of too big to fail ..............................................................................11 2.2. The post-crisis TBTF reforms .............................................................................15 2.3. Implementation status .........................................................................................19 3. Feasibility of resolution ..................................................................................................21 3.1. Progress in implementing the TBTF resolution reforms ......................................21 3.2. TLAC resources and market functioning .............................................................23 3.3. Obstacles to resolvability ....................................................................................28 3.4. Lessons from case studies .................................................................................30 3.5. Conclusion ..........................................................................................................31 4. The market’s perceptions of the credibility of reforms ....................................................31 4.1. Issues to analyse ................................................................................................31 4.2. The funding cost advantages of SIBs in the post-crisis period ............................32 4.3. The effects of reforms on implicit subsidies ........................................................35 4.4. Market discipline: the relationship between bank risk and the price of debt ........37 4.5. Credibility of resolution reforms: views of stakeholders .......................................38 4.6. Conclusion ..........................................................................................................40 5. Banks’ responses to reforms .........................................................................................40 5.1. Results ...............................................................................................................44 5.2. Conclusion ..........................................................................................................48 6. Broader effects of reforms .............................................................................................49 6.1. Changes in the structure of the financial system .................................................49 6.2. Changes in the resilience of the financial system ................................................54 6.3. Global financial integration ..................................................................................61 6.4. An estimate of the social costs and benefits of TBTF reforms .............................67 6.5. Conclusion ..........................................................................................................68 Abbreviations .......................................................................................................................70 iii Bibliography .........................................................................................................................71 Annex A: TBTF reforms and their implementation ................................................................84 Annex B: The elements of resolution reforms .......................................................................90 Annex C: Summary of public feedback and workshop ..........................................................95 Annex D: The resolution reform index ................................................................................100 Annex E: Literature review ................................................................................................. 110 Annex F: Views of credit rating agencies on resolution reforms ..........................................121 Annex G: Selected cases of public assistance or resolution of banks in FSB jurisdictions .. 124 Annex H: Testing bank behaviour .......................................................................................127 Annex I: Composition of the evaluation working group .......................................................128 iv Preface This consultation report presents the preliminary results of, and seeks comments on, the evaluation on the effects of too-big-to-fail (TBTF) reforms for systemically important banks. The TBTF reforms being evaluated have three components: (i) standards for additional loss absorbency through capital surcharges and total loss-absorbing capacity requirements; (ii) recommendations for enhanced supervision and heightened supervisory expectations; and (iii) policies to put in place effective resolution regimes and resolution planning to improve the resolvability of banks. These reforms were endorsed by the G20 in the aftermath of the 2007-08 global financial crisis and have been implemented in FSB jurisdictions over the course of the past decade. The objective of this evaluation is to examine the extent to which the reforms are reducing the systemic and moral hazard risks associated with systemically important banks, as well as their broader effects on the financial system. This report is being released in the midst of the unprecedented and still-evolving COVID-19 pandemic. The pandemic represents the biggest test of the post-reform financial system to date, as it has pushed the global economy into a recession of uncertain magnitude and duration. The rapid and coordinated response by fiscal, financial and monetary authorities has mitigated the impact of the shock on the real economy and the financial system. Authorities are making use of the flexibility built into existing international standards – including bank-specific and macroprudential buffers – to sustain the supply of financing to the real economy. However, the effects of the pandemic continue to put the financial system under strain. This evaluation has not examined the implications of recent economic and financial developments because the analysis in the consultation report was largely completed before the outbreak of the pandemic. The report does not look at specific banks, nor does it make policy proposals. Nevertheless, it draws a number of conclusions that are relevant to policymakers, market participants and other stakeholders in the current situation. The findings of the report suggest that TBTF reforms have contributed to the resilience of the banking sector and its ability to absorb, rather than amplify, shocks. Major banks are much better capitalised, less leveraged and more liquid than they were before the global financial crisis. Systemically important banks in advanced economies have built up significant loss-absorbing and recapitalisation capacity by issuing instruments that can bear losses in the event of resolution. A key finding of the report is that significant progress has been made since the global financial crisis in establishing resolution regimes and enhancing the resolvability of banks. These reforms give authorities more options for dealing with banks in distress, though which options are used is for individual authorities to consider in light of the particular circumstances. Resolution planning, together with enhanced supervision, have significantly improved the operational capabilities of banks and authorities, as well as the accuracy and detail of the information available to them. Feedback on the analysis and findings of the consultation report would be welcome, including on any additional evidence to consider and on updates to the analytical work that it may be useful to undertake in response to the pandemic. The consultation period has been extended to the end of September in order to give respondents more time to provide feedback, and the final report is expected to be published in early 2021. 1 Questions for Consultation The Financial Stability Board (FSB) is seeking comments on its consultative document on the evaluation of the effects of too-big-to-fail (TBTF) reforms. Background This
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