Regulators Redefining ‘Too-Big-to-Fail’

Global financial regulators may expand the definition of ‘too-big-to-fail‘ to include domestic lenders, clearing houses, and insurers, forcing them to abide by capital rules designed for the world’s biggest banks.

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Mark Carney, chairman of the Financial Stability Board, said yesterday that “framework should be in place for domestically systemically important banks by the end of they year,” after a meeting of the group yesterday in Basel, Switzerland.

Twenty-nine banks around the world are now subject to capital surcharges drawn up by the FSB in November for globally systemic financial institutions, including Germany’s Deutsche Bank (NYSE:DB), France’s BNP Paribas, and Goldman Sachs (NYSE:GS). However, there are many more institutions that may not be systemic on a global level, but are on a national level.

Carney said the FSB is considering putting in place tougher rules for so-called shadow banks — which include money-market mutual funds, special investment vehicles, credit hedge funds, securities lenders, and government-sponsored enterprises like Fannie Mae and Freddie Mac — whose failure could harm the global financial system.

Last year, the European Central Bank warned that shadow-banks require additional scrutiny from regulators on the risks they post to the global financial system. The EU’s financial services commissioner, Michel Barnier, said that they will go as fast as they can in considering possible rules for them.

The FSB will review its work on shadow banks no later than March, the bank said yesterday. Work on rules for systemic insurers is far less advanced, but Carney did say that there would be different requirements for different types of institutions. The 29 banks now considered to be globally systemic will have to boost reserves 1 percent to 2.5 percent above minimum levels agreed upon by international regulators.

Global regulators will also work on rules for clearing houses, and should be able to take decisions by June on the “appropriate form” of central clearers dealing with derivatives, the FSB said in a statement following its meeting on Tuesday. The FSB will also set up a group to examine cross-border disputes over rules governing banker pay.

But “although much of the regulatory agenda has been put in place, there remains a huge amount of work to be done on implementation,” said Richard Reid, research director for the International Centre for Financial Regulation.

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