Governments and financial regulators will keep fluid a list of big banks that should be classed as global systemically important financial institutions – or GSifis – as they strive to deal with the potential danger of a two-tier system.
Twenty or more of the world’s biggest banks are set to be categorised as GSifis but regulators are determined that the list should be reviewed regularly – at least annually, according to one senior supervisor – so institutions that grow fast, acquire rivals or change the way in which they interact with counterparties in the financial system can be brought into the regime.
At the same time a new global regulatory group will be created to police the way national regulators supervise their GSifis and impose tighter rules as well as possible capital surcharges and mandatory losses on creditors in the event of a government bail-out.
According to people close to the reforms, the group will also make sure that banks categorised as GSifis are treated similarly by their national regulators.
The new rules, due to be outlined in a G20 communiqué on bank regulation on Friday, will put in place a key piece of a puzzle that has remained since the financial crisis – how to deal with banks that pose a systemic risk.
The G20 announcement will come two months after global regulators at the Basel Committee on Banking Supervision outlined the core rules of its new regime.
The Financial Stability Board, the panel of central bankers and regulators responsible for enacting the G20’s decisions, plans to announce the creation of the regulatory group after the Seoul meeting to underscore that they want the rules to have teeth. However, there will be national latitude on which instruments should be used to fund systemic surcharges, including common equity, contingent capital and bail-in debt – bonds that wipe out investors automatically in crisis situations.
Under the new plan, people familiar with the communiqué say, the FSB will draw up by the middle of next year the parameters of what constitutes a GSifi, as distinct from a bank that is big in its home country but whose failure would cause ripples that are largely contained at home.
The distinction suggests big Asian institutions – notably most Japanese and Chinese banks, which are big at home but less entwined in the global financial system than Wall Street banks, for example – would not count as GSifis.
A second category of banks that are of systemic importance in a country or region would contain some names that are on the cusp of both definitions and would be among the most likely to switch into GSifis.
People familiar with the plans say that, although the focus will be on GSifis “initially”, there are moves to extend some of the extra requirements to nationally systemic groups later.
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