The Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO) have published a consultation document on global systemically important financial institutions (G-SIFIs).
The document sets out proposed assessment methodologies for identifying non-bank non-insurer (NBNI) G-SIFIs.
Systemically important financial institutions (SIFIs) are institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. At the Seoul Summit in 2010, the G20 leaders endorsed the FSB framework for reducing the systemic and moral hazard risks posed by SIFIs.
The implementation of the FSB SIFI framework requires, as a first step, the assessment of the systemic importance of financial institutions at a global level (or G-SIFIs). The framework recognises that SIFIs vary in their structures and activities, and that systemic importance and impact upon distress or failure can vary significantly across sectors. It requires that the FSB and national authorities, in consultation with the standard-setting bodies, and drawing on relevant indicators, determine which institutions will be designated as G-SIFIs. The assessment methodologies to identify G-SIFIs need to reflect the nature and degree of risks they pose to the global financial system. To date, assessment methodologies have been developed for global systemically important banks (G-SIBs) and insurers (G-SIIs).
The assessment methodologies for identifying NBNI G-SIFIs published today for public consultation complement the methodologies that currently cover banks and insurers. While the consultative document proposes specific methodologies for the identification of NBNI G-SIFIs, it does not designate any specific entities as systemically important or propose any policy measures that would apply to NBNI G-SIFIs. In the report Progress and Next Steps Towards Ending "Too-Big-To-Fail" published in September 2013, the FSB explained that policy measures will be developed once the methodologies are finalised.
In developing the methodologies, the FSB and IOSCO based their work on the following principles:
1. The overarching objective in developing the methodologies is to identify NBNI financial entities whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the global financial system and economic activity across jurisdictions.
2. The general framework for the methodologies should be broadly consistent with methodologies for identifying G-SIBs and G-SIIs, i.e. an indicator-based measurement approach where multiple indicators are selected to reflect the different aspects of what generates negative externalities and makes the distress or disorderly failure of a financial entity critical for the stability of the financial system (i.e. "impact factors" such as size, interconnectedness, and complexity).
The publication of the consultation document has already prompted a response from Dan Waters, managing director of ICI Global, and Karrie McMillan, general counsel of the Investment Company Institute.
In a joint statement they say: “As the FSB’s consultative document recognises, asset managers act as agents on behalf of investment funds and other clients. Unlike banks and insurance companies, asset managers do not invest on a principal basis and do not take on balance sheet risk. Thus, a fund’s portfolio results – whether positive or negative – belong solely to the fund’s shareholders, and do not flow through to any other fund, to the asset manager, or to the financial markets at large. ICI and ICI Global continue to maintain that, as a result of their structure, operations, and regulation, regulated funds and their managers have not been and are highly unlikely to be a source of systemic risk.”