Politics won't get in the way of Sifi plans: FSB's Draghi

Politics need not complicate the establishment of an international resolution regime for systemically important financial institutions (Sifis) that operate on a global scale, Mario Draghi, the chairman of the Financial Stability Board (FSB), said Friday.

Speaking at a press conference in Seoul, Draghi, who is also the governor of the Bank of Italy, acknowledged that regulators faced a complex task in drafting the regimes. "Resolution regimes are a by-product of a broader set of legislations and that is very different across different jurisdictions," he said.

That a degree of political will and cooperation would be needed to make that work did not trouble him. "Judging from the display of international cooperation [here], the G20 has shown to be capable so far," he said, following the G20 Seoul Summit. "So I don't think we're going to face a more difficult environment then we've done so far."

Dealing with moral hazard
Proposals released by the FSB and green-lit by the G20 on Friday call for resolution regimes to be instated for all banks. Sifis and global Sifis are to have a higher loss absorbency capacity to reflect the greater risk they pose to the financial system, and these institutions will also be subjected to more intensive supervision. These specific measures will be supplemented by robust core financial market infrastructures to cut contagion risk and other prudential measures as deemed necessary by national regulators.

The home countries of global Sifis should also enable rigorous and coordinated assessment of the risks facing these banks, which will be conducted by international supervisory colleges. Global Sifis must also have mandatory international recovery and resolution plans, and be covered by specific crisis cooperation agreements within cross-border groups. A peer review council will go over these measures. "The council will be formed by senior supervisors who, in their activities, have to deal with global Sifis," Draghi said. "Of course, the home supervisors are going to have a greater say in this [process], but it's fair to say that if you have worldwide banks, there are also other supervisors who should have a say." The peer review council will monitor the progress of the proposed reforms for global Sifis and report to the FSB.

Responsibility for national Sifis, on the other hand, will fall mainly to home supervisors. "The risk stemming from these [institutions] in the first round affects one country. Here the analysis naturally becomes much more granular," Draghi said.

Aside from the wider pool of supervisors, global Sifis will also face higher loss absorbency requirements. "Standards for large global financial firms should be commensurate with the system-wide expected losses that their failure would produce," the FSB said. The board has proposed that these banks have loss absorption capacity - made up of capital surcharges and contingent capital instruments or other bail-in capital - over and above the minimum standards required by the Basel III capital rules.