G-20’s Financial Stability Board Takes on ‘Too Big To Fail’ Ahead of Meeting In Russia

Source: Source: A.M. Best - Jeff Jeffrey | Published on September 4, 2013

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too big to failThe G-20's Financial Stability Board says financial regulators need to do more to head off risks associated with allowing companies to become "too big to fail." For some large international insurers, that would mean increased regulation under recommendations put forward by the FSB in a Sept. 2 report.

The FSB called on regulators to enact legislation, regulation and international agreements to end the "too-big-to-fail" problem in a report released ahead of the G-20 meeting in St. Petersburg, Russia, later this week.

The report focuses on progress made in implementing the FSB's policy framework for reducing the moral hazard posed by globally systemically important financial institutions, which was endorsed by the G-20 in November 2010.

The report said good progress has been made in putting this international policy framework in place, and there are signs that firms and markets are beginning to adjust to authorities' determination to end "too big to fail" but further actions are needed to complete the policy initiative to end it.

The FSB said it will work with other international bodies to support increased regulation of G-SIIs. The report also said the FSB will push for increased loss-absorption standards and increased information sharing mechanisms within crisis management groups and core supervisory colleges for global systemically important financial institutions.

"The initiative to end 'too big to fail' is ambitious, but essential for a more robust, competitive and fair financial system," FSB Chairman Mark Carney said in a statement. "While much has been accomplished over the past few years, more needs to be done. In particular, jurisdictions need to implement fully the internationally agreed policies through additional legislation and regulation; cross border co-operation agreements must be struck, and policies for gone-concern loss absorbing capacity should be developed."

The FSB's most recent report follows a similar report released Aug. 27, calling on the United States to consider moving toward a federal insurance regulatory system.

The FSB said U.S. authorities should consider whether moving to a federal regulatory structure would be a more effective means of achieving "greater regulatory uniformity."

The report said the Federal Insurance Office should "enhance its monitoring of the insurance sector" to be better able to identify potential risks posed by insurers. It also said U.S. authorities should require consolidated financial reporting for all insurance groups and give lead supervisors additional powers to fully assess the financial condition of the entire insurance group.

The Aug. 27 report drew fire from U.S. regulators and industry representatives, who argued the FSB was not basing its assessment of the U.S. state-led system on the correct criteria to determine its strength.

Connecticut Insurance Commissioner Tom Leonardi said the Aug. 27 report "simply ignores the strengths of the state-led regulatory system." Leonardi sided with industry representatives who say the report fails to account for the fact that all of the U.S. companies that suffered severe financial problems during the economic crisis of 2008 were regulated by the federal government.

The FSB also drew sharp criticism from across the insurance industry in July, following the release of an initial list of nine companies that have been designated as global systemically important insurers.

The companies included on the list will face additional regulatory oversight and more stringent capital requirements. But those requirements won't be spelled out by the International Association of Insurance Supervisors until the G-20's Summit next year. Implementation details for higher capital requirements will be developed by the end of 2015. The requirements will apply starting in January 2019 to G-SIIs identified as of November 2017, the FSB said.