Being prepared for big-bank failures

The Basel, Switzerland-based Financial Stability Board (FSB), a global financial policy-making organization, published two consultation papers on Monday dealing with ways to improve the process of resolving global systemically important banks (G-SIBs).

The move is the latest in a series of proposals put forward by the FSB in the wake of the global financial crisis of 2007-08, as it grapples with the challenge of protecting the financial services system in the event that a major global bank should fail.

One paper focuses on providing transparency about resolution planning. The other deals with winding down the derivatives and trading portfolios of a failing mega-bank.

“Effective resolution rests on the credibility of authorities’ and firms’ resolution planning and operational readiness for handling a resolution,” the FSB says.

The paper proposes providing public disclosure about banks’ resolution planning and resolvability. This disclosure would help promote the credibility of the global policy framework (developed by the FSB and the G20) for addressing the risks of banks deemed “too big to fail.”

While the FSB’s paper focuses on improving resolution planning disclosure for G-SIBs, it also notes that the same measures are relevant for domestic systemically important banks (D-SIBs), which, in Canada, includes all of the big banks.

The paper on derivatives and trading portfolios examines considerations for winding down G-SIB portfolios. Banks may have large trading portfolios that include illiquid or exotic positions.

“A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability,” the FSB warns. “Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios, such financial stability risks could spread across borders.”

Feedback on both papers is due by August 2.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.