FSB Chair Mark Carney Wants Russian G20 to Reaffirm Commitment to Reform, as FSB Unveils Too Big to Fail Update

Ahead of the G20 meeting in St Petersburg, Russia, on 5-6 September, the chairman of the Financial Stability Board (FSB) and newly appointed Governor of the Bank of England (BoE), Mark Carney, has used a press conference in London today to call for all countries to complete the national legislative processes needed to enshrine the Basel III capital adequacy regime in law and prevent the phenomenon of ‘too big to fail’ institutions from once again threatening stability. He also called for greater cross-border co-operation agreements and a sharper focus on loss-absorbing mechanisms to ensure future stability, while highlighting the need for more work to ensure insurance firms are fully included in the post-crash regulatory environment.  

Speaking in his capacity as chair of the FSB and alongside that body’s secretary general, Svein Andresen, Mark Carney explained in a press conference in London, UK, that the FSB has today sent a letter – that will not be publicly revealed until the end of this week – updating world leaders’ gathering for the Russian G20 meeting this week about the status of a number of important global financial reform initiatives. Paramount among these was the Basel III capital adequacy regime, with the co-ordinating Basel Committee on Banking Supervision (BCBS) recent monitoring report expected to be much discussed at the palatial Constantine Palace in St Petersburg, Russia. 

Others issues up for debate at the impending G20 meeting this week on 5-6 September – and recently provided with status report updates – include shadow banking; the over-the-counter (OTC) derivatives regulatory reforms; and financial benchmark reform following the Libor manipulation scandal. The drive to end the reliance on CRA ratings as part of an effort to stop the “mechanistic reliance of regulatory regimes and of market participants on external credit ratings agencies, which can lead to herd behaviour” was also cited at today’s press conference in London, the purpose of which was to try to prove the work already done in reforming the world’s financial system following the 2008 crash.

To finish this work, however, Carney stressed that the G20 organisation needs to continue to drive the reform agenda forward, as it did at the post-crash London G20 meeting and the Pittsburgh G20 gathering back in 2009. This largely laid out the OTC regulatory changes demanding a move to central repositories, centralised clearing and so forth outlined under the subsequent US Dodd-Frank Act and European Market Infrastructure Regulation (EMIR) – not to mention the commitment to the new Basel III capital adequacy regime, shadow banking restrictions (including money market funds MMF reform), and other post-crash regulatory moves which flowed from Pittsburgh.

To ensure the Pittsburgh G20 agenda is met and advanced at this latest G20 meeting in Russia this week, however, requires constant vigilance, governmental support and international cross-border support – principally via the G20 – and Carney was quick to call for this global co-operation, among world leaders, national regulators and everyone with a stake in the post-crash financial reform package. 

News Analysis

The movement for a new regulatory environment following the 2008 crash is now coming to fruition as all these regulations hove into view. As Carney said at the FSB press conference hosted by the Bank of England in London, UK, today: “We now have to move from developing powers to the practical [implementation] stage.” 

“We need to continue to enhance international co-operation and information sharing, which is especially relevant for the ‘too big to fail’ issue, as governing systemically important financial institutions (SIFIs) requires cross-border collaboration,” continued Carney. “I want the G20 to reaffirm its commitment to reform [and international co-operation].” 

The need to extend enhanced SIFI capital adequacy requirements to insurance firms, with nine already identified, needs to be progressed too, admitted Carney, although he did explain that banks naturally – being at the core of the global financial system – received attention first in this area. Governing globe-spanning SIFI multi-nationals would also help to incubate the international co-operation needed to ensure a stable worldwide financial system, argued Carney, as the only way to regulate such nation-spanning institutions is for politicians, regulators, central bankers and everyone else to co-operate. 

Too Big to Fail Progress Report Also Unveiled

The issue of loss-absorbing mechanisms to ensure future financial stability was also discussed at the FSB press conference today in London, UK, alongside the Basel III liquidity coverage ratio (LCR) and the need for risk-weighted assets (RWAs) to more dynamically reflect credit risk. Indeed the FSB also released a new report today entitled ‘Progress and Next Steps Towards Ending Too Big to Fail’, reflecting the holistic nature of all these inter-connected regulatory moves.

The FSB progress report is intended to help G20 leaders gathering in St Petersburg, Russia, this week understand the status of the body’s policy framework for reducing the moral hazard posed by SIFIs – particularly the resolution regimes being introduced to ensure that if, god forbid, there was another Lehman Brothers-like collapse a more orderly wrap-up could be followed this time.

The report backs Carney’s own call for international bodies to co-operate to complete the policy initiative to end the ‘too big to fail’ problem. In particular, jurisdictions should:

• Undertake the legislative reforms that are necessary to implement the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’. This is the international standard for FI resolution regimes adopted in November 2011 and should be in force by 2015 argues the FSB report. It needs to be implemented by then across all parts of the financial sector that could cause systemic problems, including systemically important insurers and financial market infrastructures (FMIs), such as central counterparties (CCPs).
• Empower domestic authorities to share information and cooperate fully.
• Take legislative action as necessary to make resolution effective in a cross-border context.
• Address impediments to resolvability that arise from complexities in firms’ legal, financial and operational structures [i.e. the drive for a common legal entity identifier (LEI) and so forth -Ed].
• Consider complementary domestic structural measures that help promote financial stability and improve the resolvability of FIs without posing unnecessary constraints on the integration of the global financial system or creating incentives for regulatory arbitrage. 
• Implement policy measures for domestic systemically important banks [as the UK, for instance, has done with its Vickers report -Ed].
• Ensure that supervisors have the capacity to resource themselves and the independence to meet their mandate.

Conclusions

The FSB ‘Progress and Next Steps Towards Ending Too Big to Fail’ report, and Mark Carney’s supporting words at the London pre-G20 FSB press conference in London, demonstrate the need for international co-operation to achieve comprehensive financial reform and complete the global post-crash regulatory drive.

But it must remain open to debate whether this week’s G20 meeting in Russia on 5-6 September will truly support this final regulatory push, given that the agenda is likely to be hijacked by political concerns surrounding Syria and the Middle-East. I suspect that Syria will dominate the G20 meeting in Russia as non-financial issues increasingly tend to do at these supposedly economic gatherings of the world’s leading 20 economies.  

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