Joining Up Prudential and Resolution Regulation For Systemically Important Banks

Abstract

We set out a stylised framework for the policies enacted to address the risks from systemically important institutions and to counter the too-big-to-fail (TBTF) problem, examining conceptually how far supervisory and resolution policies are complementary or substitutable. The Financial Stability Board’s (FSB) TBTF reforms comprise (i) a higher loss-absorbing capacity in the form of capital buffers, (ii) more intensive and effective supervision and (iii) a recovery and resolution regime to cope with institutions in distress or when failing. These reform strands are part of a fundamentally integrated concept, but were largely developed and implemented independently of each other. Therefore, they may fall short of fully taking into account interdependencies, rendering policies less effective and consistent compared to an integrated approach that we outline instead. The analysis discusses the regulatory interplay and its implications for policymaking based on the FSB TBTF reforms for banks, its operationalisation in the Basel framework at the global level and in the European Union.

[This paper has been published in a slightly revised version as ESRB Occasional paper N°25 https://www.esrb.europa.eu/pub/series/occasional-papers/html/index.en.html]

Keywords: Financial Regulation, Financial Stability, Going Concern, Gone Concern, Macroprudential Policy, Resolution Framework, Systemic Risk, Systemically Important Institutions, Too Big To Fail

JEL Classification: G01, G28, G38