Wednesday, 6 March 2013

Systemically important financial institution

A systemically important financial institution is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. As the 2007-2012 global financial crises has unfolded, the international community has moved to protect the global financial system through preventing the failure of SIFIs, or, if one does fail, limiting the adverse effects of its failure. In November 2011, the Financial Stability Board published a list of global systemically important financial institutions.

The Basel Committee on Banking Supervision introduced new regulations (known as Basel III) that also specifically target SIFIs. The main focus of the regulations is to increase bank capital requirements and to introduce capital surcharges for systemically important banks. However, some economists have warned that the tighter Basel III capital regulation, which is primarily based on risk-weighted assets, may further negatively affect the stability of the financial system. It's important to note that both the Financial Stability Board and the the Basel Committee are only policy research and development entities.

They do not establish laws, regulations or rules for any financial institution directly. They merely act in an advisory capacity. It's up to each country's specific lawmakers and regulators to enact whatever portions of the recommendations they deem appropriate. Each country's internal financial regulators make their own determination of what is a Systemically Important Financial Institution. Once those regulators make that determination, they set the exactly what specific laws, regulations and rules will apply to those entities.