Banking on Reform: Can Volcker, Vickers and Liikanen Resolve the Too-Important-to-Fail Conundrum?

by José Viñals and Ceyla Pazarbasioglu

The global regulatory landscape governing banks has changed from its pre-crisis status quo.

In addition to the Group of Twenty advanced and emerging economies led global regulatory reforms, like Basel III, the United States and the United Kingdom have decided to directly impose limits on the scope of banks' businesses. The European Union is contemplating a similar move.

We discussed these structural banking reforms a few weeks ago with officials from finance ministries, central banks, and supervisory authorities from around the world during the IMF and World Bank Spring Meetings. The design and implementation of these measures will have implications for global financial stability and sustainable growth, so we wanted to bring people together for the first global debate of the issue with G20 and other countries.

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A Tale of Titans: The Too Important to Fail Conundrum

Folklore is riddled with tales of a lone actor undoing a titan: David and Goliath; Heracles and Atlas; Jack and the Beanstalk, to name a few. Financial institutions seen as too important to fail have become even larger and more complex since the global crisis. We need look no further than the example of investment bank Lehman Brothers to understand how one financial institution’s failure can threaten the global financial system and create devastating effects to economies around the world. We’ve been looking at how to fix the too important to fail problem, and favor market based measures to help reduce the likelihood and impact of a failure. Global regulators have come up with a new set of tighter rules for all banks, known as Basel III, as a starting point to make the system less risky and address a number of regulatory issues. Implementation may take several years, however, while systemic institutions continue to grow in size and complexity, and may resume their risky practices. So in the interim, we’d like to see rapid, credible, and visible actions.

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