The term “systemically important financial institution” — or SIFI — fell into common use in the wake of the 2008 financial crisis. According to the Financial Stability Board, “SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.”
In other words: SIFIs are too big to fail, a term which itself has become so commonly used its acronym (TBTF) has pretty much replaced it in day-to-day use. In 2012, the FSB published a list of global SIFIs (or G-SIFIs), identifying by name the financial institutions that it believed were so large their failure would cause significant national or even global economic damage. Some of the institutions included on the list are: Bank of America (NYSE:BAC), Barclays (NYSE:BCS), Citigroup (NYSE:C), HSBC (NYSE:HBC), and JPMorgan (NYSE:JPM).
Killing too big to fail means doing two things: reducing the likelihood that a bank will fail in the first place, and ensuring that — should a collapse occur — the bank can either absorb its own loss, or be wound down in such a way that does not impose harm on the public. New regulations are focused on containing the burden of failure to shareholders and creditors, not taxpayers. In short, regulators can’t guarantee that a bank will never fail, but they can reduce the likelihood, and they can reduce the damage done to the public.
Let’s take a look at the various ways regulators are approaching too big to fail, and how new policy will affect the world’s largest financial institutions.