Stability Board Says ‘Much Work to be Done’ to Secure Financial System

The Group of 20’s financial taskforce said on Friday there is still much work to be done on its regulation agenda to ensure that financial stability is secured.

In a progress report to the leaders’ summit in Seoul, the Financial Stability Board said its work on “too big to fail banks” could take several years and it will prioritize setting up a framework and timeline for big globally interconnected institutions.

But the FSB added it will also look at extending this framework to non-banking companies including insurance firms.

“As experience is gained, the FSB will review how to extend the framework to cover a wider group of SIFIs, including financial market infrastructures, insurance companies and other non-bank financial institutions,” it said.

Setting extra rules for “systemically important financial institutions” (SIFIs) is proving to be one of the toughest issues to deal with on the G20’s regulation agenda.

Two of the main sticking points have been what the definition of a SIFI is and whether such banks should have extra capital surcharged imposed on them.

The FSB has decided to press ahead by focusing on global SIFIs, which it says are institutions of such “size, market importance and global interconnectedness” that they would disrupt the global financial system and cause “adverse economic consequences across a range of countries” if they get into trouble.

The banks which fall into the category will be agreed upon by the middle of 2011 by the FSB, national regulators and other international supervisory groups.

The FSB said it will then decide, with the Basel Committee on Banking Supervision, on extra measures to boost these banks’ capacity to absorb losses by the end of that year.

“Depending on national circumstances, this greater capacity could be drawn from a menu of viable alternatives” the FSB said.

These options are likely to include a combination of capital surcharges, contingent bonds that convert to equity at a certain trigger point and “bail-in” debt.

However the FSB added that in some circumstances it may now recognize some other policy options which would reduce the riskiness of a global SIFI.

“The FSB may recognize that further measures, including liquidity surcharges, tighter large exposure restrictions, levies, and structural measures could reduce the risks of externalities that a G-SIFI poses,” it said.

In addition, countries hosting global SIFIs will have to enable an internationally co-ordinated assessment of the risks facing the bank and come up with a cross-border resolution plan.

Countries with a national, as opposed to global, SIFI in their jurisdiction will also be required to have in place a resolution regime and be subject to more intensive supervision.

Looking at the G20’s wider reform agenda, the FSB said that while the new Basel rules on capital do much to tighten up bank supervision, more needs to be done in a number of other areas.

It flagged work to converge international accounting standards, saying changes to the fair value treatment of debt securities by the U.S. Financial Accounting Standard Board could pose an obstacle to part of that process.

On credit rating agencies, the FSB said that while work was in process to try to reduce the financial sector’s reliance on ratings, there were still challenges in trying to identify “objective alternatives”.

(Editing by Nick Macfie)