Evaluation of the effects of too-big-to-fail reforms: Final Report
This final report reflects feedback and more extensive description of issues raised in public consultation, as well as analytical updates since the outbreak of the COVID-19 pandemic.
The Financial Stability Board (FSB) today published the final report on its evaluation of the effects of too-big-to-fail (TBTF) reforms for systemically important banks (SIBs). The evaluation examines the extent to which the reforms have reduced the systemic and moral hazard risks associated with SIBs, as well as their broader effects on the financial system.
The evaluation finds that TBTF reforms have made banks more resilient and resolvable, and that reforms have produced net benefits to society. Indicators of systemic risk and moral hazard moved in the right direction, suggesting that market participants view these reforms as credible. Increased bank resilience and greater market discipline have been tested by the COVID-19 pandemic. However, banks – thanks also to the unprecedented fiscal, monetary and supervisory support measures – have so far been able to absorb the shock.
Nevertheless, the evaluation finds some gaps that need to be addressed:
Resolution reforms should be implemented in full to enhance the feasibility and credibility of resolution, minimising the need for state support of failing banks. This includes further work to enhance the resolvability of SIBs.
There is still scope to improve public disclosures of information relating to resolution frameworks and funding mechanisms and resolution actions. Additional information, for example on Total Loss Absorbing Capital (TLAC) holdings, could enable public authorities and market participants to assess the potential impact of resolution actions.
The application of the reforms to domestic systemically important banks warrants further monitoring and improvements in data.
The report also highlights that, in response to TBTF reforms, risks associated with credit intermediation may have shifted to non-bank finance. Following up on its Holistic Review of the March 2020 market turmoil, the FSB has embarked on a comprehensive work programme to enhance the resilience of non-bank financial intermediation.
Claudia M. Buch, Vice-President of the Deutsche Bundesbank and chair of the group that produced the report, said: “Higher capital for systemically important banks is key for financial stability, and the report shows no material negative side effects. But we also need mechanisms to restructure and resolve banks in stress. While the evaluation highlights the progress we have made, more can be done to fully realise the benefits of these reforms. I look forward to further work by the FSB and standard-setting bodies to close the gaps we have identified”.