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FSB on Structural Reform- too early to tell, may be trouble ahead

The FSB has published an interesting round-up of structural banking reforms as a report to the G20 Leaders for the November 2014 summit. The short (21 page) report overviews structural reform in the G20 jurisdictions and assesses their consonance and cross-border consistency. While it is a usefully concise summary of the various nascent and ongoing structural reform initiatives; it is more interesting as a dryly magisterial portent of “cross-border complications”- a phrase that should be well-backed as the slogan for post-2008 financial regulatory reform. Its main findings follow:

  • All jurisdictions (including those that are not undertaking structural reform) agree that such reform supports the systemic-risk-reducing, anti-TBTF agenda.
  • Those jurisdictions not undertaking explicit structural reform foresee possibly negative consequences: impacts on the efficiency of cross-border groups, complications to crisis-management and resolvability, decreased liquidity, regulatory arbitrage and leakage to the shadow banking system. They have no hard evidence of impact to their domestic systems to date, but note that structural reform is barely underway.
  • Restrictions to provide greater ex ante transparencies in a resolution scenario may affect cross-border capital flows. It is recognised that consciously decreasing cross-border interconnectedness may be equivalent to fragmentation. The previous “we have to see how it works out” caveat applies here also.
  • Structural reform bears watching with particular respect to cross-border resolution and the liquidity of sovereign\corporate bond markets previously reliant on global banks.

The report summarises the wide spectrum of structural reform from the US Volcker Rule, through the UK ring-fence, the EU Liikanen proposal and French-German domestic measures, Switzerland, Indonesia, Singapore, India, Saudi Arabia to Japan which proposes zero structural reform. The report concludes that “given the relatively early stage of banking reform implementation” it is too early to assess possible adverse cross-border impacts. However, it assures the G20 that both itself and national authorities are closely monitoring developments and that cross-border resolution questions will be at least partly resolved by ongoing G-SIB plans.

While it may be true that “the reforms being implemented are supportive of the broader international agenda of ensuring a more resilient global financial system where the TBTF problem has been reduced” – it is essentially meaningless. International banking structural reform, even in its largely proposed form, is a stranger to coherence. Beginning with the, relatively but not particularly, stringent Volcker rule, subsequent proposals resemble gradations of lack of commitment. The TBTF global aim may end up being achieved whereby the largest banks have to conform to so many inconsistent regulations that they find themselves simply- Too Big to Prosper.

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