Building resilient financial institutions
Achieving a stronger banking system is the overriding priority, hence the importance assigned to full implementation of Basel capital and liquidity standards. A simple, but effective, leverage standard has been imported from Canada. It will protect the system from risks we think are low but in fact are not.
These measures have lowered the probability of failure. However, our goal is not a fully risk-proofed system. That is neither attainable nor desirable.
Ending too-big-to-fail
Since failures will still happen, there remains the need to reduce their impact, which is one of the reasons to focus on ending too-big-to-fail. More fundamentally, we must address, once and for all, the unfairness of a system that privatises gains and socialises losses. By restoring capitalism to the capitalists, discipline in the system will increase and, with time, systemic risks will be reduced. Most importantly, the knowledge that major firms in markets far away can fail, without meaningful consequences at home, will restore confidence in an open global system.
To achieve this objective, bondholders, shareholders and management—rather than taxpayers—must bear the brunt of losses. To this end, all FSB member countries have committed to have in place a bail-in authority. In addition, each global systemically important bank must have in place a Resolution and Recovery Plan within the next six months, to be supplemented by cross-border co-operation agreements.
The framework for systemic institutions is now being extended to domestic banks, global insurers, and key shadow banks. When implemented, greater supervisory intensity and higher loss absorbency will ensure that the system is never again beholden to the fate of a single firm or group of firms.