Regulating Systemically Important Financial Institutions

2150 Words9 Pages
Introduction The recent global financial crisis of 2007-2009 has brought people’s attention to the threat presented by a certain type of financial institutions which are imperative to the functioning of the financial system to the extent that the failure or insolvency of such institutions can destabilise the financial system, and subsequently impose serious negative effects on the real economy (Freixas, & Rochet, 2013; Ueda & Weder di Mauro, 2013; Bongini & Nieri, 2014; Elliott & Litan, 2011). These “systemically important financial institutions” (SIFIs) consequently become the main focus of policymakers and regulatory authorities in order to control the systemic risk posed by these entities (Barth et al., 2013). Therefore, this essay aims…show more content…
In addition, different countries use different accounting systems in calculating total assets which can produce divergent and more importantly incomparable figures, making measuring systemic importance solely by “size” more problematic (Barth et al., 2013). Policymakers and scholars have hence started to realise the difference between the size and the systemic importance of a financial institution (Zhou, 2010). For example, after Group of Twenty (G-20) quickly established the Financial Stability Board (FSB) at the 2009 London Summit for the purpose of developing and implementing reform agenda to ensure the stability of the financial system, FSB was assigned by G-20 during 2010 Seoul summit to identify global systemically important financial institutions (G-SIFIs) which pose systemic risk to both national and international financial systems (Barth et al., 2013). A year before that, FSB has recognised three important indicators of systemic importance, namely the size, interconnectedness and substitutability of a financial institution (Bongini & Nieri, 2014). In July 2011, the Basel Committee on Bank Supervision (BCBS) (2013) publicised a document which provides a detailed methodology for assessing systemic importance of G-SIBs (globally systemically important banks) , further including the measures of complexity and cross-jurisdictional activity on top of the three submitted by FSB. This methodology therefore identifies five equally-weighted (20%)
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