Geneva Reports on the World Economy 12
Thursday, 08 July 2010 00:00
A Safer World Financial System: Improving the Resolution of Systemic Institutions.
Stijn Claessens, Richard J. Herring and Dirk Schoenmaker
Geneva Report on the World Economy 12: Endgames matter in financial regulation. Who is in charge and how losses are allocated strongly affects incentives and behavior long before difficulties arise. Most countries though lack an effective framework for resolving systemically important financial institutions (SIFIs). All too often, as in the recent crisis, the endgame is instead determined by frantic improvisations over a chaotic weekend under crisis conditions. The international expansion of SIFIs makes this a global problem, leading to conflicts among three policy objectives – preservation of national sovereignty, enhancement of international financial integration and preservation of financial stability – a financial trilemma. This Report examines three approaches to the resolution of SIFIs that address the trilemma.
A universal approach - sharing all assets in the bankruptcy estate equitably across creditors wherever they may reside and using a common burden sharing mechanism – may be feasible only among closely integrated countries. A territorial approach – ring-fencing assets locally so that they are first available to satisfy local claims – impedes efficient international financial integration.
This Report favors a modified universal approach, which requires SIFIs to put in place better resolution plans; each country to adopt improved resolution rules; and countries to jointly adopt an enhanced set of rules governing cross-border resolutions. The integration of regulation, supervision and resolution policies should be enshrined in a new Concordat. With this approach, the authors hope, the world can move from the present situation in which national authorities "can" to one in which they actually "will" cooperate and thereby make the global financial system safer and more efficient.
Publication Date: 08.07.2010
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