Ending 'Too Big to Fail'--why Asia Pacific countries should embrace the Key Attributes

Abstract

Financial institutions (FIs) provide services that are critical to the smooth operation of the global economy and every national economy. Banks look after their customers’ money and provide money transmission services so that customers can be paid their salaries, pay their bills and withdraw cash through ATMs. They provide credit to individuals and businesses. They also provide infrastructure and services that corporate treasuries, pension funds, other investment funds, institutional investors and governments use to hold their cash and securities, facilitate cross-border transfers, and access central counterparties (CCPs), clearing systems and other financial market infrastructures (FMIs). Insurers among other things provide risk transfer mechanism under which insurers take the risks of large and potentially uncertain losses and in return provide a sense of security for individuals and businesses. Most FIs are commercial entities that aim to generate profits for their shareholders, and like any other commercial company they may fail if they are badly run or have a flawed business model. If a large FI does fail, it is likely to cause significant disruption unless there is a way in which critical services can continue. Key points When financial institutions became non-viable during the global financial crisis, there was no way to let them fail while keeping their systemically important and critical functions running, so governments had to bail them out. Since 2011 the Financial Stability Board’s Key Attributes have been an international blueprint for resolution regimes under which systemically important and critical functions can continue when a financial institution fails, with no government bailout being needed. The Key Attributes do not have force of law, so each country needs to ensure that its local laws reflect the Key Attributes. Some countries in the Asia Pacific region are taking urgent steps to embrace the Key Attributes, but others are not. Countries that do not embrace the Key Attributes are likely to be marginalized as financial centres in the medium to long term, as large international financial institutions will restrict their critical businesses in, and key support services they receive from, those countries.