yaseen anwar : managing systemically important financial institutions ( sifis ) speech by mr yaseen anwar, governor of the state bank of pakistan, at the second meeting of the financial stability board ( fsb ) regional consultative group for asia, kuala lumpur, 14 may 2012. * * * ladies and gentlemen, good evening. it is indeed a pleasure to be here in kuala lumpur again, and i am grateful to governor zeti for inviting me as a lead discussant on one of the key challenges of regulatory reform agenda – “ managing systemically important financial institutions ”. in these few minutes, i will cover the need for specific regulations for sifis, progress made so far in designing the policy framework, perspectives of emerging markets in general and pakistan in particular, regulatory challenges faced by supervisory authorities, and what remains to be done. in the aftermath of the global financial crisis ( gfc ) 2007 – 08, the entire supervisory perspective towards financial institutions regulation has taken a u - turn. in the pre crisis era, supervisory authorities, mainly in advanced countries, chose to rely on market discipline and favored somewhat self regulation by the financial industry. the approach stemmed from the perception that financial institutions are in the best position to understand the market and risk associated with financial products. overly prescriptive regulations were thought to stifle innovation and diversification – both across borders and across activities. the prevailing version of international accord on capital and liquidity standards, basel ii, further reinforced this practice. most frameworks relied on banks ’ own assessment of risks. however the gfc, particularly the collapse of lehman brothers in the fall of 2008, triggered problems throughout the financial system across the world and changed supervisory perspective towards financial industry regulations, particularly the so called “ systemically important financial institutions ( sifis1 ) ”. the lehman bankruptcy with ensuing financial instability and loss of real output brought forth several shortcomings of the international financial architecture that exposed risks resulting from a lack of a policy framework for dealing with sifis. in the pre - gfc era it was precisely these institutions that were deemed quite invincible. however, the huge costs of implicit government guarantees of not letting a sifi to fail and their adverse impact on global financial stability, raised serious concerns on “ too big to fail ” ( tbtf ) status of sifis. post crisis era witnesses increased discussion on changing tbtf status of sifis and for devising a resolution regime as well as safe exit mechanisms for these

systemically important at the national level. recently, financial stability oversight council ( fsoc ) in the usa proposed guidance on the see annexure 1 for a list of g - sifis by fsb bis central bankers ’ speeches process and the factors that it will use to designate non - bank financial institutions as sifis. some jurisdictions have already adopted legislation to improve their resolution regimes like germany, where supervisory powers have been significantly extended to restructure and resolve banks. on the other hand, many institutions have actively lobbied against being identified as a sifi, because of the additional and significant regulatory requirements that sifis will endure. emerging markets emerging economies financial systems remained fairly resilient in the face of recent crisis. it was possible firstly because financial systems in emerging economies have primarily domestically active fis. this argument can be supported by the fact that out of 29 designated g - sifis3 only one bank from asia ; “ the bank of china ” could make it on the list. secondly, financial systems in emerging economies remain relatively conservative – activities are mainly centered on more traditional banking businesses while capital markets and other financial institutions remain relatively underdeveloped. the difference between financial structures and business models of developed and emerging economies have raised concerns regarding relevance of the reforms – which mainly addresses causes of gfc – for emerging economies. moreover, since the asian financial crisis of 1997 – 98, financial authorities have not only carried out extensive reforms but are very keen in continuously monitoring and adapting to the changing market conditions. nonetheless, it is a common understanding that supervisory authorities around the world need to give special attention to sifis by focusing on the development of specific, relevant and appropriate regulatory standards. in this regard, asian economies are quite well aware of the issues involving implementation of such a framework. firstly, emerging asia is now at the center of global economic growth. to sustain such growth, the need for financial intermediation is also likely to increase. while there is a global consensus on the use of public funds for resolution of sifis as a last resort, there can also be circumstances in which use of public funds may be less costly to the economy than excessively “ taxing ” of the banking system. asian economies must weigh the cost of new regulations on institutions, against the perceived benefits that those regulations have for the economy and society. secondly, international standards must be customized according to asian economies business models. the regulatory and supervisory regime must target well - defined risks that could have