On 30 September 2020, Finance Watch has submitted its response to the consultation on the Financial Stability Board’s report “Evaluation of the effects of too-big-to-fail reforms” which was published in June 2020.
Given the immense and lasting damage inflicted on the general public by the 2007/08 crisis there is no doubt, in our view, that “ending too-big-to-fail” represents the correct interpretation of the underlying policy objective, namely to remove once and for all the implicit guarantee extended by the public to excessively large financial institutions.
In the terms of reference for this present review, however, the objectives of TBTF reforms are to “reduce the moral hazard risks and externalities posed by these [systemically important] banks, and enhance the ability of authorities to resolve them in an orderly manner …”. According to the Consultation Report (pg. 13), the reforms are “intended to reduce the probability and cost of financial crisis“. The main policy objective that originally informed this endeavour, and which should be the benchmark of this review – whether the reforms of the past ten years have ended, or are at least expected to end TBTF in the foreseeable future – no longer figures.
Finance Watch is concerned about the shift in semantics from “ending TBTF” back to “addressing TBTF”. We appreciate that a degree of semantic ambiguity may have been helpful to facilitate consensus and convenient to maintain political room for manoeuvre in dealing with a complex subject. In the context of trying to evaluate the effectiveness and adequacy of measures taken, such ambiguity does not serve the purpose well. The financial crisis of 2007/08 and its aftermath have demonstrated that there is little public support in most jurisdictions for rescuing privately-owned financial institutions from the effects of a crisis that they have brought upon themselves. Anything short of an unambiguous commitment of policymakers and the FSB to “ending too-big-to-fail” is unlikely to fully restore public trust in the financial system.