The major economies' financial reforms come up short on one crucial aspect – the resolution of systematically important cross-border financial institutions. This column introduces the latest Geneva Report on the World Economy, which advocates a two-tier solution to this problem – a universal approach for closely integrated countries such as EU members and a modified universal approach for other countries. It explicitly rejects the territorial or go-it-alone approach.
Financial reform legislation is finally being put in place in the US and EU in response to the 2007-2009 global financial crisis. Much is riding on these reforms: fostering more robust yet profitable financial systems, preventing a repeat of the biggest crisis since the Great Depression, and supporting efficient financial intermediation that helps economies grow. A crucial dimension of the reforms is how to deal with large cross-border financial institutions when they run into trouble.
This has been a long-standing but much neglected issue. After 26 years of negotiations aimed at harmonising international bank supervision and regulation, the Basel Committee on Banking Supervision has only recently turned its attention to harmonisation of the resolution of cross-border banks (Basel Committee, 2010). And even then it has been a slow haul. While taken up by the G20 at their London and Pittsburgh summits, the recent Toronto communiqué accorded the topic low priority. So far only the UK and, quite recently, the US (with the not-yet-passed Dodd-Frank bill) have taken the issue seriously.
The twelfth Geneva Report argues that, rather than being an afterthought, resolution of cross-border systemically important (i.e., "too big to fail") financial institutions should be the centrepiece of any serious reform of the international financial system. It shows how essential it is to integrate capital regulation, supervision, and resolution policies to minimise failures and reduce international spillovers should they, nonetheless, occur...
Stijn Claessens, Richard J. Herring and Dirk Schoenmaker write at Voxeu.org.
Finance Focus
