The Financial Stability Board (FSB) today published for public consultation two discussion papers that consider measures to improve the resolvability of global systemically important banks (G-SIBs).
Following the global financial crisis the FSB has led international efforts to address the risk that major financial institutions are too-big-to-fail. The adoption of the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions as the international standard for recovery and resolution of financial institutions and its implementation across FSB jurisdictions are core to this initiative.
Effective resolution rests on the credibility of authorities’ and firms’ resolution planning and operational readiness for handling a resolution. The FSB’s discussion papers focus on resolution-related public disclosures that strengthen the credibility of resolution planning; and on measures to ensure the effective operationalisation of a solvent-wind down of derivatives portfolios as recovery or resolution measure.
Transparency with respect to resolution planning and resolvability should help promote the credibility of the FSB and G20 policy framework for addressing the moral hazard risk posed by systemically important financial institutions.
The FSB’s discussion paper explores how general and firm-specific disclosures on resolution planning and resolvability could be further enhanced, focusing mainly on disclosures of resolution planning for G-SIBs. However, many of the disclosure approaches discussed are also relevant for domestic systemically important banks and other firms subject to a resolution planning requirement.
Many G-SIBs have large derivative and trading portfolios, including in some cases with illiquid or exotic positions. A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability. Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios (including the intra-group transactions arising from firms’ booking models) such financial stability risks could spread across borders.
This discussion paper sets out considerations related to the solvent wind-down of the derivative and trading book activities of a G-SIB that may be relevant for authorities and firms for both recovery and resolution planning.