The Financial Stability Board (FSB) is still trying to decide just where insurers should fit in rules meant to address systemic and moral hazard risks at systemically important financial institutions (SIFIs).
The G20, a group for developed economies, set up the FSB, Basel, Switzerland, to help develop strategies for increasing the stability of the world financial system.
The FSB and a related group, the Basel Committee on Banking Supervision, today began seeking comments on two documents that describe measures for controlling SIFI risk.
The groups developed the measures to implement a framework that the G20 leaders endorsed in November 2010.
The banking group’s document deals with regulation of banks.
The FSB document, on Effective Resolution of Systemically Important Financial Institutions, refers directly to insurers and other types of non-bank SIFIs.
Drafters call for:
- Strengthened national resolution regimes that give a designated resolution authority a broad range of powers and tools to resolve a financial institution that is no longer viable.
- Cross-border cooperation arrangements in the form of institution-specific cooperation agreements, backed by national law.
- Improved resolution planning by firms and authorities based on regular resolvability assessments.
- Measures to remove obstacles to resolution arising from “complex firm structures and business practices, fragmented information systems, intra-group transactions, reliance on service providers and the provision of global payment services.”
The FSB also has released discussion notes on the “creditor hierarchy” — who should be first in line to get paid if a SIFI fails.
In a discussion of scope, FSB document drafters note that many document objectives could apply to SIFIs of all sizes that could be systemically significant or critical in particular circumstances.
“Yet, the crisis response needs to be tailored to the specific nature of the firm’s activities and to sectoral differences,” drafters say. “It is important that resolution regimes provide a wide range of tools and the flexibility to apply them on a case-by-case basis to achieve an effective resolution.”
The drafters also suggest all resolution powers described in the document may not be suitable for all sectors and all circumstances.
“For example, to the extent that insurers conduct activities which are bank-like, the application of banking sector resolution tools to such activities rather than to the insurer as a whole or to its core traditional insurance business may be appropriate,” drafters say.
The FSB will be working with the International Association of Insurance Supervisors, Basel, and other groups “to develop sector-specific guidance for the application of its framework to non-bank SIFIs, including insurance companies, financial infrastructures and other financial institutions,” drafters say.
In a section on “questions for consultation,” document drafters ask, “Is there a risk of arbitrage in giving a preference to all depositors or should a possible preference be restricted to certain categories of depositors, e.g., retail deposits? What should be the treatment of (a) deposits from large corporates; (b) deposits from other financial firms, including banks, assets managers and hedge banks, insurers and pension funds; (c) the (subrogated) claims of the deposit guarantee schemes (especially in jurisdictions where these schemes are financed by the banking industry)?”
Comments on the FSB document are due Sept. 2. The FSB hopes to submit final recommendations to the G20 leaders in November, in Cannes.