implications of the too - big - to - fail reforms for global banking | deutsche bundesbank implications of the too - big - to - fail reforms for global banking remarks by claudia m. buch, vice - president, deutsche bundesbank prepared for the iifbpi colloquium on cross - border resolution & regulation 09. 07. 2020 | virtuell | claudia buch 1 motivation 2 the capacity of globally active banks to absorb shocks has increased 3 there has been progress with regard to the feasibility and credibility of resolution 4 this progress has not come at the expense of lending to the economy or increase fragmentation of ﬁnancial markets 5 more needs to be done 6 further reading 1 motivation in the aftermath of the 2008 global ﬁnancial crisis, the g20 endorsed a number of reforms intended to make the ﬁnancial system safer. a core element of these reforms are policies that are addressing the “ too - big - to - fail ( tbtf ) reforms ” in order to reduce moral hazard and systemic risk. these reforms include standards for additional loss absorbency through capital surcharges and requirements for total loss - absorbing capacity, recommendations for enhanced supervision and heightened supervisory expectations, and policies to put into place effective resolution regimes and resolution planning to improve the resolvability of banks. many of the systemically important banks affected by these reforms operate across borders. effective policies to address the too - big - to - fail issue thus require international policy coordination, and the financial stability board ( fsb ) plays an important role in this regard. whether a bank is considered to be globally systemically important is based on an internationally agreed set of criteria. on this basis, the fsb publishes an annual list of about 30 globally systemically important banks or g - sibs. in https : / / www. bundesbank. de / en / press / speeches / implications - of - the - too - big - to - fail - reforms - for - global - banking - 836618 1 / 10 8 / 4 / 2020 implications of the too - big - to - fail reforms for global banking | deutsche bundesbank addition, there are domestic systemically important banks or d ‐ sibs. these are designated by their home authorities, and their number stood at 132 at the end of 2018. fsb standards provide that host authorities should impose internal total loss - absorbing capacity ( tlac ) requirements for material subgroups of systemically important banks residing in their jurisdiction. resolution plans

- systemic it can be treated in isolation. in the case of the debt crisis, the debt problems of countries can and should be treated as a series of individual problems and not as a systemic problem affecting the euro area as a whole. things are different in the case of a systemic event, mainly due to the effect of contagion loops between the different sovereigns, the loops between the public sector and the financial sector, the contagion loops between different financial intermediaries and ultimately the feedback loops between the financial sector and the real economy. the degree of financial integration in the euro area is such that if some sovereigns are pushed into a bad equilibrium this affects other countries. the banking system can become fragile. what starts as a liquidity problem can easily turn into a solvency problem. strong externalities are created, making it impossible to isolate the problem of one country from the rest of the euro area. bis central bankers ’ speeches at the outset, the event might have originated locally, caused by local problems, in which case it might only be possible to solve it by addressing those root problems. in the meantime, however, we have seen how local problems can turn into a systemic problem. for example, local problems in some countries arise from a low degree of competitiveness, unsustainable fiscal positions or a combination of both. the eventual solution is a gradual and steady improvement of their competitiveness and fiscal positions. there is no substitute for such an adjustment process at the local level. in the present situation, however, we may need additional instruments, for example firewalls or recapitalization measures, to address the systemic component. turning to another example, the interest rates of some countries proved too low during the first decade of the euro, leading to house price booms and credit growth in those countries. these two factors have contributed to the recent crisis. again, local problems turned into a systemic problem. here, the solution is a balance sheet adjustment of banks and households. and again there is no getting round this tedious approach. the instruments to address the systemic component that are now available may assist this process. at the end of last year we saw clear signs of a systemic financial crisis. the provision of liquidity for a period of three years, together with measures to strengthen fiscal discipline and to restructure greek debts in an orderly fashion, has managed to mitigate the stress to some extent ; at least for some period of time. recently, tensions in the