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Financial Services

Regulation of systemically important financial institutions (SIFI)

Since the global financial crisis, when taxpayer funds were used by many governments to bail out troubled financial institutions, finding new measures to address systemic and moral hazard risks has been near the top of the global policy agenda. 

International and domestic supervisors have focused on those institutions – deemed systemically important financial institutions (SIFIs) – whose distress or disorderly failure could disrupt the wider financial system due to their size, complexity, or interconnectedness. At an international level, the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), and the International Association of Insurance Supervisors (IAIS) are all addressing the "too big to fail" issue with a multi-pronged, integrated set of policies, including:

  • Additional loss absorption capacity
  • International standards for national recovery and resolution regimes for failing institutions
  • More intensive and effective supervision

With the number of financial institutions considered systemically important at the international and domestic levels potentially numbering in the hundreds, there are many questions to consider. Will applying the SIFI label to an institution imply that it cannot be allowed to fail? As domestic regulators continue to focus on protecting national interests, will SIFI designations limit cross-border merger-and-acquisition activities and limit institutions from participating in activities deemed risky by government authorities? Will firms designated as SIFIs accrue advantages, such as improved customer retention or easier access to funding? Will institutions just below the SIFI threshold be held to SIFI standards by investors and supervisors, suffering all the disadvantages while gaining none of the benefits?

Regardless of whether SIFI designation proves to be an advantage or a liability, the fact remains that it is becoming increasingly common. The real debate on the implications has only just begun.

Explore this issue:

  • Banking in transition: overseeing non-financial risk in the midst of technological and business model transformation

    Non-financial risks have been among the greatest sources of risk for large banks since the financial crisis. Conduct and compliance issues, systems failures, and cybersecurity have risen to the top of risk committee agendas, but remain difficult to monitor, measure, and predict. Even as technology offers new mitigation tools, the transformative changes underway in large banks are creating new and different sources of non-financial risks. As banks overhaul systems, operations, business models, and structures to become more agile and efficient, the pace and scale of change is creating execution risk. As banks navigate their way through this transformation, boards and executives are identifying ways to improve management and oversight of these risks.  

  • Cyber risk management: the focus shifts to governance

    Cyber risk has attracted a great deal of attention in recent years, and banks, who are among the most-targeted, have made substantial investments in cybersecurity. Despite this investment, cyber vulnerability continues to present unique challenges for risk management and oversight.  As technology is increasingly embedded in all aspects of banking, cyber risk is expanding, requiring greater board attention. In response, boards are taking steps to improve governance and oversight of cybersecurity. At the same time, regulatory authorities are becoming increasingly prescriptive in defining cyber risk expectations and emphasizing the role of governance and controls.   

  • The paradox of unity and division: an unprecedented political landscape leads to high policy uncertainty

    In the US, the Republican Party now controls the presidency and both houses of Congress for the first time in a decade. This may clear the way for a more pro-business policy agenda; however, populist and anti-business sentiment remains strong and, to date, President Trump has proven to be a highly unconventional leader. A participant summarized, “Whatever rulebook you thought this all played by is going into the shredder. Plan for unexpected events and curveballs.” In this ViewPoints, leading insurers exchange views on the changing US political landscape and the potential effects on US commercial markets and the insurance sector. 

  • Revolutionary change is transforming the financial services landscape

    In October 2016, Tapestry Networks and EY hosted the Financial Services Leadership Summit, which brought together more than 80 financial sector leaders to discuss the extraordinary changes happening across the financial services landscape. Participants included directors and executives of the largest global banks, insurers, asset managers, regulators, fintech entrepreneurs, and other subject matter experts.  ViewPoints synthesizes these and other discussions with participants in the Bank and Insurance Governance Leadership Networks over the second half of 2016. Technology is lowering the barriers to entry for emerging competitors and transforming the way incumbents do business, rapidly altering the competitive marketplace. At the same time, unprecedented macroeconomic and geopolitical conditions, driven by underlying structural changes, are creating a degree of uncertainty about the environment through which leaders must guide these institutions. Regulation will need to continue to evolve in response. A summit participant summarized, “Revolutions only get called with hindsight … We are in a period of accelerated evolution that will be called a revolution in financial services.”

  • Clarifying supervisory expectations for non-executive directors and boards

    Governance is now a cornerstone of supervision. As such, effective boards are important to supervisors, who have been raising expectations for boards and directors, accompanied by increasing calls for board and individual accountability.  

    Over the last several months, directors and supervisors shared perspectives on expectations for bank boards and directors, including roundtable discussions in New York and London. These discussions highlighted that while directors accept heightened expectations for engagement, including a significant time commitment relative to other corporate boards, there remain opportunities to improve clarity regarding the role of a bank board and realistic expectations for what it can accomplish.  

  • Changing regulatory capital regimes: implications and market reactions

    Despite years of regulatory reform, insurers now face another wave of new requirements. The European Union’s Solvency II has just come into force, and the International Association of Insurance Supervisors, anticipates completion of the International Capital Standard and additional systemically important insurer requirements by 2020.In this ViewPoints, leading insurers share perspectives on how these regimes may operate or require adjustment in the future, as well as how shareholders and markets may interpret and react to new solvency metrics.

  • The future of banking in Europe: regulation, supervision, and a changing competitive landscape

    All large banks continue to face political, regulatory, and market pressure.  European banks face particularly daunting challenges. As Europe pushes for a banking union, the ECB’s role as a single regulator and supervisor for the Eurozone becomes an important player in the transformation of European banking. Having completed its first year, it wants to establish itself as a strong regulator and ensure the stability of the European banking system.  At the same time, many European banks are faced with the need to fundamentally address their business models in the context of a broader policy debate about what banking structures will best support European economic growth.

  • Building sustainable models for banks and their investors

    At the seventh BGLN Summit, participants focused on how banks are adapting strategies, business models, and operations to a changing competitive landscape. Non-executive directors and senior executives from among the largest global banks were joined by regulators and other participants representing investor and other stakeholder perspectives for discussions on some of the challenges and opportunities for banks as they seek to improve returns and attract investment. This ViewPoints synthesizes themes emerging from the summit discussion including how regulation is driving changes to bank structures, the need to build more agile banks to attract investment, increasingly active investors and requests for board-shareholder engagement, and potential systemic risk stemming from reduced market liquidity.

  • Creating a common language for regulating global insurers

    Though the post-crisis reform agenda has been underway for many years, insurance supervisors have yet to create a truly common and international language through which to understand complex insurers’ vast operations. Many see global capital standards and recovery and resolution planning as essential elements of this common language. However, making progress on these standards will require addressing significant tensions within existing regulatory frameworks, and meaningful consensus within, and across, the public and private sectors.

  • Toward global standards for group supervision

    For the largest insurers, the focus of regulation has expanded beyond policyholder protection and insurer solvency to promoting and protecting global financial stability. To enhance stability, supervisors need a truly global view of firms’ activities and are developing new requirements, including group supervision standards, ComFrame, global capital standards, and recovery and resolution planning, to achieve these ends. This ViewPoints captures practical insights related to how boards and supervisors are addressing the changing nature of group supervision. 

  • Implications of “systemically important” designation for insurers

    Regulatory authorities have begun to designate insurers as "systemically important," ushering in new regulatory requirements. Industry leaders differ on how this new brand of regulation will impact the industry. To some degree, the debate over systemic importance is just an extension of the broader discussion about the new regulatory requirements and regimes emerging in Europe, the United States and elsewhere – regimes that will require more capital and supervision. Insurance Governance Leadership Network (IGLN) participants discussed the potential benefits and challenges that a G-SII designation will generate.

  • The future of cross-border supervision in Europe: practical and political challenges in establishing a European banking union

    The recent introduction of the European banking union aims to improve cross-border supervision of large global banks, but presents challenges for both banks and regulators inside and outside the EU. In March 2013, BGLN participants met to discuss these challenges, concluding: though improved, cross-border supervision is far from optimal; a European Single Supervisory Mechanism (SSM) is coming, but key questions remain; the SSM can only work if other building blocks are in place; and, the debate on the banking union is a microcosm of the debate on European integration and power shifts.

  • Discussion on SIFI designation heats up for insurers

    Insurers have long argued that, unlike banks, they are not systemically important. However, new global regulations will soon designate a number of insurers as global systemically important insurers (G-SII). Participants at the October IGLN meeting discussed the challenges and opportunities resulting from G-SII designation.

  • Reinventing regulation of systemically important banks

    Participants in the second Bank Directors Summit discussed global regulatory reform and what has driven its design. New laws and regulatory frameworks challenge systemically important financial institutions, and unlevel implementation may create relative advantage for certain countries and regions.

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