Seminar paper from the year 2011 in the subject Economics - International Economic Relations, grade: 1,0, Johannes Gutenberg University Mainz (Professur für Volkswirtschaftslehre, insb. Wirtschaftspolitik und Internationale Makroökonomik Prof. Dr. Beatrice Weder di Mauro ), language: English, abstract: As a result of the worldwide financial crisis which occurred in 2007, an intensive discussion about preventing possible future crisis like that has arisen. One of the key points in these debates is the necessity to protect the economy from negative effects of failing financial institutions. These can be dramatic what you can see by reflecting the facts of the recent crisis that is characterized by big bank failures and so caused domino effects. Thus it is very important to reduce the so called systemic relevance of financial institutions. But the design of a framework that contains systemic risk effectively is not just a simple task, because you have to consider a couple of factors in view of creating an effective solution. This paper presents a short overview of the issue of hazard that is caused by systemic relevant institutions (SIFI) and the content of the actual debate by illustrating the costs the institutions cause and the presentation and evaluation of several approaches of economic experts with regard to the topic of reducing systemic relevance. Finally the paper tries to draw a conclusion.

Most countries lack an effective framework for dealing with failing systemically important financial institutions (SIFIs). This report argues that any serious attempt to stabilize the global financial system must include carefully crafted policies for restructuring these "too big to fail" cross-border institutions. The report recommends approaches for resolving SIFIs in a way that will maintain national sovereignty, enhance international financial integration, and preserve financial stability. Copublished with the International Center for Monetary and Banking Studies (ICMB)

The U.S., the U.K., and more recently, the E.U., have proposed policy measures directly targeting complexity and business structures of banks. Unlike other, price-based reforms (e.g., Basel 3 and G-SIFI surcharges), these proposals have been developed unilaterally with material differences in scope, design and implementation schedules. This may exacerbate cross-border regulatory arbitrage and put a further burden on consolidated supervision and cross-border resolution. This paper provides an analysis of the potential implications of implementing different structural policy measures. It proposes a pragmatic and coordinated approach to development of these policies to reduce risk of regulatory arbitrage and minimize unintended consequences. In doing so, it also aims to identify a set of common policy measures that countries could adopt to re-scope bank business models and corporate structures.

Since the financial crisis, policymakers have developed two different approaches to systemic risk arising from nonbank financial firms such as insurance companies and investment banks. The first, dubbed an entity-based approach, empowers a public entity like the Financial Stability Oversight Council or Financial Stability Board to designate individual nonbank systemically important financial institutions for enhanced regulation and supervision. The second, known as an activities-based approach, seeks to regulate financial activities that can produce systemic risk. During the first several years after the crisis, governments and multi-national standard setters embraced both entity- and activities-based approaches to the problem of nonbank systemic risk. More recently, however, an emerging view has begun to dominate financial regulatory circles: that regulators should focus principally on an activities-based, rather than an entity-based, approach.This book chapter challenges this emerging consensus. It argues that, in the absence of entity-based designations, a purely activities-based approach will expose the financial system to the same risks that the world experienced in 2008. This chapter, which is substantially based on a more detailed law review article by the authors, focuses on the international dimensions of nonbank systemic risk regulation and the shift by multi-national standard-setters to an activities-based approach.

This Article examines a relatively recent addition to the institutional architecture of financial regulation in the United States: the Financial Stability Oversight Council (FSOC). In particular, it draws attention to a flaw in the design of the Council's power to designate nonbank financial companies as “systemically important financial institutions,” commonly known as “SIFIs.” Specifically, the Article argues that the binary nature of the designation power has underappreciated costs, which make the SIFI designation system less effective and efficient than it otherwise could be.The Article makes both positive and normative claims. First, it draws attention to the ways in which a binary designation power incentivizes certain financial institution behavior, such as litigation and restructuring. A binary designation power can also influence regulatory behavior by creating an opportunity for politicized decision making. The Article highlights the social and economic costs of these behaviors, which include the potential for underinclusive supervisory scope, increased information asymmetries, and distorted business decisions. Such costs can undermine the SIFI stability agenda as well as financial institution efficiency. Second, in teasing out the normative implications of that cost analysis, the Article argues for a more marginal -- nuanced -- apparatus for regulating nonbank financial institutions. In doing so, the Article also probes the broader question of whether the entity-based paradigm is the most effective regulatory strategy for appraising and addressing systemic risk in the nonbank arena. Ultimately, by exploring how SIFI policy should be revised to reflect these normative insights, the Article develops a broader theory about post-crisis regulatory design -- that regulators have undervalued supervision, and the information it produces, as a tool for systemic risk management outside the traditional banking system.

This paper updates the IMF’s work on general principles, strategies, and techniques from an operational perspective in preparing for and managing systemic banking crises in light of the experiences and challenges faced during and since the global financial crisis. It summarizes IMF advice concerning these areas from staff of the IMF Monetary and Capital Markets Department (MCM), drawing on Executive Board Papers, IMF staff publications, and country documents (including program documents and technical assistance reports). Unless stated otherwise, the guidance is generally applicable across the IMF membership.