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The new standard, 'Key Attributes of Effective Resolution Regimes for Financial Institutions', will help address the “too-big-to-fail” problem by making it possible to resolve any financial institution in an orderly manner and without exposing the taxpayer to the risk of loss, protecting vital economic functions through mechanisms for losses to be shared (in order of seniority) between shareholders and unsecured and uninsured creditors.
The Key Attributes are a core component of the FSB policy measures, endorsed by the G20 Leaders to address the risks to the global financial system from SIFIs.
More specifically, the Key Attributes require jurisdictions to:
The Key Attributes of Effective Resolution Regimes are the result of work undertaken by the FSB jointly with its members including the IMF, World Bank and the standard-setting bodies.
An earlier draft was subject to a public consultation in July and August of this year. Responses to that consultation strongly supported the resolution powers and framework proposed by the FSB (see Overview of Responses to the Public Consultation), and resulted in some technical improvements to the standard.
The G20 and the FSB are calling on countries to undertake the reforms necessary to implement this standard. Implementation will require legislative changes, significantly stepped-up cooperation amongst authorities across borders, and reviews by firms and competent authorities of G-SIFI business structures and operations to improve recovery and resolution planning.
Mario Draghi, Chairman of the FSB said: “The big lesson of the crisis is that the world needs a way of resolving any financial institution - no matter what size - if it gets into trouble. The FSB Key Attributes are a breakthrough. They represent a very significant step towards achieving this international policy goal of making too-big-to-fail a thing of the past. Once incorporated into laws, they will provide national authorities with the necessary powers to act swiftly and decisively to carry out an orderly resolution of a failing SIFI. Using those tools, authorities need to re-energise resolvability assessments and planning to address the obstacles to resolution that size and complexity have posed.”
Paul Tucker, Deputy Governor of the Bank of England and Chairman of the Resolution Steering Group that developed the Key Attributes, added that “together with the additional loss absorbency for globally systemic banks, the Key Attributes will help to produce a more disciplined and resilient financial system where taxpayers no longer bear the costs of banking failures. The role of bondholders in monitoring banking risks is vital.”
The FSB will initiate an iterative process of peer reviews of its member jurisdictions to assess implementation of the Key Attributes beginning in 2012 and extending into 2013. For the initial group of 29 G-SIFIs, authorities will have to meet the resolution planning requirements by end-2012. An FSB Peer Review Council will review the consistent implementation of the G-SIFI requirements.