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17 March 2014

BoE/Cunliffe: Is the world financial system safer now?

Cunliffe surveyed the progress made by international standard-setters since 2008 in making the financial system safer. He urged the EP to give national regulators authority to wind down troubled financial institutions, saying major banks remained "too big to fail".

"It is crucial that the European Parliament now gives its final approval to the proposed resolution directive.  And that the directive and the new ‘bail in’ rules form the bedrock of the new Single Resolution Mechanism for the Banking Union in the euro area", Cunliffe said.

Even with new ‘bail in’ rules, further steps are needed to ensure major international banks can be safely resolved.  Jon Cunliffe underlined: “We have made a lot of progress on too big to fail. But we are not yet there. I do not think we can say with confidence now that we could resolve a failing global giant. Getting agreement on international standards to end Too Big to Fail is perhaps the most important regulatory priority for the G20 Summit in Brisbane in November this year.”

In addition to completing the design of international standards, Jon Cunliffe set out two further conditions that must be met to ensure the success of the reform programme: coherence and mutual trust.

On the first, Cunliffe said he has some sympathy for concerns about the unintended consequences of regulation, and for firms’ desire for certainty about the regulatory endpoint, though the financial sector itself continues to throw up fresh regulatory issues. “We will need to be very alive to ‘coherence’ as implementation progresses.”

A much harder condition for the success of regulatory reform is that of “mutual trust”, he said. This is necessary because at international level, authorities can only agree standards. It is a matter for national legislators to enshrine these standards in law, while implementation and supervision can only be done by national supervisors answerable to national parliaments. "Without mutual trust, the danger is either slipping back into weak regulation and supervision and regulatory arbitrage risking further crises or fragmentation of the international financial sector – a rolling back of financial globalisation that will damage global growth."

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