> Global banking: Foresights and insights (Series III)
Global banking: Foresights and insights (Video V)SIFI rules are recasting global banking
The global financial crash has set off a raft of new financial regulation at the local and international levels. One particularly notable development is the move to identify the largest global banks – those capable of causing the most damage to the global financial system should things go wrong – and then to tailor risk-reducing regulations for them.
The new rules for these systemically important financial institutions – or SIFIs — set more stringent capital and liquidity requirements that are causing the largest global banks to restructure their businesses in important ways.
What is a SIFI? (Part 1 of 14): A systemically important financial institution (SIFI) is a financial institution considered sufficiently large, complex and interconnected that – should it experience serious financial issues – could cause significant damage to other financial institutions and the global financial system.
Who identifies SIFIs and how many are there? (Part 2 of 14): Central bankers, regulators and other senior policy makers decide which institutions receive a SIFI designation. In the US, approximately 130 institutions have received SIFI designation. Some 28 global banks have been tentatively identified as GSIBs – global systemically important banks.
What does SIFI status mean for banks? (Part 3 of 14): SIFIs will be subject to more rigorous financial regulations, including stricter capital controls, intended to avert financial defaults and systemic failures. Some banks on the borderline of SIFI status may opt to hold their assets below the line in order to avoid the extra regulation that comes with a SIFI designation.
What happens if the regulatory 'playing field' is not level? (Part 4 of 14): Regulatory guidance is being developed by global regulators and policy makers to ensure the stability of global financial institutions. However, ultimately, they will be implemented at the national level. This raises concerns about these standards being realized in a consistent way.
How will additional capital controls affect SIFIs? (Part 5 of 14): Increased capital requirements are lowering the return on equity for many global banks. However, stricter rules may help the “biggest of the big” financial institutions to be viewed as less risky or as “premier counterparties.”
Risk-weighted assets – what happens when enforcement differs by region? (Part 6 of 14): The dilemma for regulators is how much discretion to allow banks in assigning different levels of risk to their assets. There also is tension between banks and different geographies in terms of whether they are risk-weighting their assets in the same way.
The tension between 'too big to fail' and moral hazard continues (Part 7 of 14): On the one hand, SIFI designation can restrict banks with tighter rules. On the other, the designation could cause some investors and counterparties to view a SIFI as more likely to get bailed out if trouble arises.
Will SIFI designations succeed? (Part 8 of 14): Many observers see the SIFI designation process as an improvement over how risks were governed in the past. Ideally, a fully functioning SIFI regime would provide a seamless regulatory process across borders, but is this reality?
The business impact and cost of resolution and recovery plans (Part 9 of 14): Living wills – or recovery and resolution plans – are costly and time-consuming to prepare. But banks are gaining important benefits, including a deeper understanding of their organizations, particularly when it comes to capital and liquidity issues.
A new category of banks beyond SIFIs (Part 10 of 14): The largest of large banks could face onerous restrictions as regulators try to cap the size of universal institutions. Will creating this “last bucket” category dim the outlook for bank mergers and acquisitions?
The outlook for mergers and acquisitions (Part 11 of 14): Are there too many financial institutions in the world competing for existing business? Some observers say yes. Yet, potential restrictions on mergers and acquisitions to prevent the creation of megabanks could make consolidation more difficult.
Do non-regulated institutions have an advantage? (Part 12 of 14): Are banks at a disadvantage compared with unregulated non-bank institutions, such as hedge funds and money market funds?
Recommendations for CEOs of global banks (Part 13 of 14): Key considerations for bank CEOs include understanding more deeply their customers and the services they need, identifying growth opportunities and using technology to strengthen their firms' ability to adapt nimbly to changing conditions.
Identifying future risks (Part 14 of 14): As banks increasingly rely on automated systems to meet customer needs, security issues around information technology will become critical. The relationship between risk and executive compensation models also will be an area of greater focus.
SIFI rules are recasting global banking (full video): The new rules for SIFIs set more stringent capital and liquidity requirements that are causing the largest global banks to restructure their businesses in important ways.
Steve Sherretta, Knowledge@Wharton editor
Bill Schlich Global Banking & Capital Markets Leader, EY
Don Vangel Senior Advisor, Banking and Regulatory Matters, EY
Itay Goldstein Professor of Finance, The Wharton School
Planning for growth
Detailed reports on the implication for key functions and processes
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.