Reforms to keep the world’s largest banks from being “too big to fail” have made lenders more resilient and less susceptible to risky behavior than before the 2008 financial crisis, but the gaps remain in the new regulatory regime , according to the Financial Stability Board.
Systemically important global banks, or GSIBs, are now better capitalized and have accumulated significantly greater ability to absorb losses, with their base capital ratios on average doubling since 2011, the FSB said in a post-regulation review of the regulation. crisis.
The problem of moral hazard, the danger that bankers may take excessive risks if they believe they are not responsible if their bets go wrong, has also decreased, according to the report. Banks no longer enjoy the implicit financing subsidy they had before 2008, and investors increasingly value the danger that any bank debt they own will be discharged if the lender collapses.
“The reforms appear to be working, systemic risk measures are falling and bank financing costs now reflect the real probability of a bailout,” said Claudia Buch, vice president of the German Bundesbank, who led the report. “There are net benefits for society. . . higher financing costs for banks but lower risks for the taxpayer. “
The Basel-based FSB, led by Randal Quarles, a United States Federal Reserve governor responsible for oversight, makes recommendations to the G20 nations on financial rules and regulations. Since the financial crisis, it has been trying to end the problem of institutions “too big to fail.”
“As we learn how the new system works, we also learn where it can still be improved,” added Buch. “There are still gaps that need to be addressed, but the benefits significantly outweigh the costs.”
An area for improvement is the procedures for liquidating a bankrupt lender. While regulators in each country have introduced regimes designed to do this more easily without affecting customers, the robustness of these regimes and the way they are implemented are patchy. No country other than the United States has a public disclosure requirement for resolution plans.
The FSB also noted broader deficiencies in banks’ financial reporting and official disclosures, especially given the advances in technology and data management in recent years. IT reliability and sophistication have long been a problem for European banks, which generally have less ability to invest in the area compared to their US peers.
While some critics cautioned that tightening regulations for big banks would stifle lending to the real economy and slow economic growth, the FSB said “no significant negative side effects of the reforms have been observed” in this regard.
“Other market participants have entered areas where large banks have reduced their activities, while market fragmentation has not increased,” he concluded.
The FSB is working on a separate review of the more lightly regulated non-banking, or shadow banking, sector. It has rapidly grown to more than $ 50 trillion in assets as banks withdraw from riskier activities, such as proprietary trading and structured finance, and non-bank lenders step in to take their place.
However, the FSB said it was not overly concerned with the growth of the sector. He noted that some non-bank financial institutions had stronger balance sheets and performed better than regulated entities, and clients benefited from various sources of credit.
