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Home > Financial Stability > International developments
 

International developments

​The Bank’s work on resolution contributes to both domestic and international resolution policy development.  In recent years, international standards for resolution have been developed by the Financial Stability Board (FSB) and adopted in the UK, for banks, building societies and investment firms, through the transposition of the EU Bank Recovery and Resolution Directive (BRRD).

At the Pittsburgh Summit in 2009, G-20 Leaders called on the FSB to propose measures to address the systemic and moral hazard risks associated with systemically important financial institutions (SIFIs). SIFIs are institutions of such size, market importance and interconnectedness that their distress or failure would cause significant dislocation in the financial system and adverse economic consequences. The ‘too-big-to-fail’ (TBTF) problem arises when the threatened failure of a SIFI leaves public authorities with no option but to bail it out using public funds in order to avoid financial instability and adverse effects on the real economy. The knowledge that this can happen encourages SIFIs to take excessive risks and represents an implicit public subsidy of private enterprise.

At the Seoul Summit in 2010, G-20 leaders endorsed the FSB framework for ‘Reducing the moral hazard posed by SIFIs’ (SIFI framework).  This framework addresses the TBTF issue by reducing the probability and impact of SIFIs failing. It comprises requirements for assessing the systemic importance of institutions, for additional loss absorbency, for increased supervisory intensity, for more effective resolution mechanisms, and for stronger financial market infrastructure.

In 2011, the G-20 endorsed the Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) as a new international standard for the reform of resolution regimes. The Key Attributes set out the responsibilities, instruments and powers that resolution regimes in all jurisdictions should have to enable authorities to resolve failing financial firms in an orderly manner and without exposing the taxpayer to the risk of loss.  They were expanded in October 2014 to cover financial market infrastructure, insurers and the treatment of client assets.

Although substantial progress has been made in implementing the SIFI framework, more needs to be done to solve the problem of TBTF. In particular, the FSB has urged G-20 Leaders to make further progress in the following six areas: commit to legislative reforms; remove obstacles to cross-border resolution; improve the resolvability of firms’ structures and operations; consider domestic structural measures that are complementary to an effective SIFI framework; implement policy measured for domestic systemically important banks (D-SIBs); and remove obstacles to supervisory effectiveness.

Ending TBTF is one of the three medium-term priorities identified by the Financial Policy Committee (FPC) in September 2013. The Committee aims to review and, where necessary, influence the design and implementation of domestic and international reforms to address the TBTF problem.

In July 2014, the BRRD was adopted by the European Union. The Directive establishes a European framework for the recovery and resolution of banks and large investment firms and complies with the Financial Stability Board’s Key Attributes.  It should be transposed into national law by 1 January 2015. The BRRD sets out the roles and responsibilities for firms, supervisors and resolution authorities in ‘business as usual’ (recovery and resolution planning); as a firm begins to weaken (early intervention tools); and in resolution (resolution tools).  It also sets out a framework for cooperation between Member States prior to and during resolution, as well as with resolution authorities outside the EU.

In October 2014, the Bank of England participated in an exercise designed to further the understanding, communication, and cooperation between US and UK authorities in the event of the failure and resolution of a global systemically important bank (G-SIB).  The exercise involved the heads of the Treasuries and leading financial regulatory bodies in the United States and United Kingdom.

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