Due to their unique role and concentration of positions, non-banks such as global insurers, global central counterparties and large asset managing entities undoubtedly entail systemic risks that have to be carefully monitored and mitigated. This is already acknowledged by standard setters (CPMI-IOSCO) and by the Financial Stability Board and would probably deserve a specific conference. What makes banks specific among systemic institutions is the presence of implicit subsidies and this feature is the main focus of today’s conference. Allow me to elaborate a bit on the TBTF problem and the implicit subsidy To prevent the collapse of the global financial system, governments in major jurisdictions stepped in by bailing out some financial institutions or by providing public guarantee to unsecured bank-debt holders. This use of tax-payers money for preventing private losses entailed sizeable direct costs for governments, in terms of both political support and fiscal implications. A more indirect, but equally important concern is that these interventions – aimed at stabilizing markets – may have reinforced market perceptions that some financial firms are too important-to-fail. When markets anticipate that some financial firms will benefit from future public support, their uninsured creditors have little incentives to charge a rate commensurate with the risk of their investment. These institutions thus enjoy a funding cost advantage – in essence an implicit public subsidy. This implicit subsidy raises two important concerns for financial stability. First, it encourages risk-taking by the entities concerned, which are not subject to a proper creditors’ market discipline.

First, for the first time, taxpayer funded bailouts were extended to the uninsured creditors of nondeposit-taking entities (the names of Bears Stearns and AIG naturally come to mind) for fears that their failures would have severe negative externalities. Second, the list of globally systemically important banks is now set up and published by an official international body, the Financial Stability Board, on the basis of a mandate given by the G20. In itself, this simple fact could be interpreted by markets as a signal that public authorities will never allow the thirty firms belonging to the list of G-SIBs to fail. On the other hand, expectations of public support for too-systemic-to-fail institution are likely to have been reinforced by the market turmoil that followed the failure of Lehman Brothers. Let me now flag some of the questions/challenges that could be addressed today. The first question that naturally comes to mind is the measure of the phenomenon, i.e. : “How big is the implicit subsidy?” A quick look at the literature shows that measuring the subsidy is difficult, since it is implicit and tied to market perceptions. In addition, differences in funding prices between large or systemic banks and small or non-systemic banks can be due to factors unrelated to potential government support, such as differences in economies of scale and scope, or differences in the size and liquidity of bonds issuance. Overlooking these alternative factors could lead to overestimate the size of the implicit public subsidy.