International Finance Regulation: The Quest for Financial Stability

CHAPTER 8 The Structure of Banking: How Many Degrees of Separation?

“I am speaking of nascent efforts to regulate the multi-trillion dollar asset management industry. This war promises to be even bigger than the one megabanks have waged against the Volcker rule's proposed ban on speculative trading.”

—Former FDIC Chair Sheila Bair

Too big to fail”¹ has become a key element of focus on banking regulation. Is size really the issue? How is size being defined? The debate is heating up after the U.S. Congress came up with a bipartisan plan to deal with this issue. The United States has organized a possible separation of banking from trading in case of excess, followed by European initiatives in April 2014.

These structural reforms are diversely regulated: will they avoid what are fundamentally two different businesses inside a universal banking model? Is there a need to go back to the Glass-Steagall Act in the United States?

SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS (SIFIS)

The definition of systemically important financial institutions² and the imposition of additional capital requirements is an important step toward a better oversight of systemic risks by central banks and ministers of finance.

The Financial Stability Board (FSB) published a list of the 28 financial institutions considered to be systemically important.³ See Table 8.1.

TABLE 8.1 Global Systemically Important Banks as of November 2012 Allocated to Buckets Corresponding to Required Level of Additional Loss ...