The banking system is still vulnerable to the ‘too big to fail’ problem and so the European Parliament must give its final approval to the resolution directive, a deputy governor of the Bank of England has said.
Sir Jon Cunliffe (pictured), who is responsible for financial stability, said in a speech on Monday that the directive, along with the new ‘bail in’ rules, form the bedrock of the new Single Resolution Mechanism for the Banking Union in the European Union.
But he said that even with the new rules, further steps are needed to ensure that major international banks can be safely resolved. “I do not think we can say with confidence now that we could resolve a failing global giant,” he said. “Getting agreement on international standards to end Too Big to Fail is perhaps the most important regulatory priority for the G20 Summit in Brisbane in November this year.”
Sir Jon set out two further conditions ensure the success of the reform programme that has been undertaken since 2008: coherence and mutual trust. On the first, Sir Jon said he has some sympathy for those who ask, “When will this regulatory tsunami end?” and who express concerns about the “unintended consequences” of regulation “We will need to be very alive to ‘coherence’ as implementation progresses,” he said.
Focus on outcomes, not rulebook comparisons
A much harder condition for the success of regulatory reform is that of “mutual trust”. This is necessary because at international level, authorities can only agree standards. It is a matter for national legislators to enshrine these standards in law, while implementation and supervision can only be done by national supervisors answerable to national parliaments.
“Without mutual trust, the danger is either: slipping back into weak regulation and supervision and regulatory arbitrage, risking further crises; or fragmentation of the international financial sector – a rolling back of financial globalisation that will damage global growth.”
He said that the Financial Stability Board has been helping jurisdictions that have implemented standards in different ways to come to a shared view on mutual recognition: “The key is agreeing to focus on the outcomes achieved in different jurisdictions rather than a line by line comparison of respective rulebooks. But unless we can maintain and foster mutual trust as we implement the reforms, we will not succeed in, on the one hand, maintaining an integrated global financial sector and, on the other, ensuring it is proof to frequent destabilising crises.”
CCP risks and cyber-threats
Sir Jon’s speech came the same day that the Bank of England published its annual report on the supervision of financial market infrastructures.
The report provides an account of how the Bank has exercised its responsibilities in respect of financial market infrastructure supervision. It is the first such report since the Bank assumed new responsibilities for central counterparties (CCPs) and securities settlement systems in April 2013.
The Bank says that it has devoted a “significant part” of its supervisory effort to examining CCPs’ financial risk management. CCPs have now introduced enhanced margin models and made other improvements to their risk management arrangements. Additionally, all UK CCPs have now introduced arrangements to manage clearing member default losses that exceed their pre-funded resources.
The Bank has been working with other UK authorities on assessing, testing and improving the resilience of core parts of the UK financial sector to cyber attack.
Sir John’s speech is available by clicking here
The annual report on the supervision of financial market infrastructures is available by clicking here.