Too big to fail Flashcards
What are the three main strategies to solve the TBTF problem?
- Stricter and size dependent capital and lucidity requirements
- Size limits
- Adaption of legal framework and financial mkts infrastructures to enable orderly wind downs
Why do economies of scale play an important role in banking?
- Law of large numbers makes large banks safer for given liquidity buffer
- Information technology, risk mngmnt and legal compliance = huge fixed costs
- Economies of scale = strong theoretical argument against size limit
- Limit where costs due to higher complexity exceed economies of scale
What is the aim of the Swiss approach?
Banking act aims at
- Mitigating risks for financial stability posed by domestic systemically important banks
- Ensuring continuity of domestic systemically important functions
- Avoiding government aid
How is a Domestic systemically important bank characterized?
- Mkt share in domestic systemically important functions
- Size (total assets /GDP and amount of insured deposits)
- Interconnectedness with financial mkt and real sector
- Risk profile
Who names the D-SIBs and their D-SIFs?
The SNB via decree after hearing concerned banks and the FINMA
On what is the SNB’s authority based to name the D-SIBs and D-SIFs?
- Mandate to contribute to financial stability
- Economic competence
- Role as lender of last resort
What is the legal procedure of the swiss approach?
- SNB identifies potential D-SIBs and opens legal proceedings
- Hearing of FINMA and concerned D-SIB
- SNB’s injunction naming D-SIB and its D-SIFs
- D-SIB subject to special requirements under FINMA’s supervision
What are the special requirements of the D-SIB?
Depending of degree of systemic importance, special requirements in following domains:
- Capitalization
- Organisation
- Liquidity
- Diversification of risks
Who defines the special requirements?
FINMA via decree after hearing SNB
What are the three components of the capital requirements for D-SIBs?
- Basis requirements: 4.5% of RWA
- Progressive component: 1-87% of RWA
- Buffer: 8.5% of RWA
What are CoCo bonds?
Contingent convertible bonds = hybrid debt instruments that automatically convert into equity capital if bank’s CET1 to RWA ratio falls below predefined level
- Automatic conversion into equity should ensure capacity to absorb losses on a going concern basis
- Before conversion interest rate payments are tax deductible
Why high- and low-triggering CoCo bonds?
- High: restore bank’s equity in crisis without need to issue shares (CET1/RWA <7%)
- Low: finance bank’s emergency plan and eventual orderly wind down (CET1/(RWA<5%)
What are the organizational requirements of D-SIB?
Each D-SIB presents emergency plan regarding structure, infrastructure, management, controlling, and liquidity and capital flows to ensure continuation of its D-SIFs in situation of imminent insolvency
→ plan approved by FINMA
What are the features of the emergency plan?
- Triggered if CET1/RWA<5%
- Include split up of D-SIB into a bridge bank containing D-SIFs and a rest bank
- Bridge bank merged into another bank and rest bank liquidated
- Low-triggering CoCo bonds finance bank’s emergency plan to maintain principle of no creditor worse off
What are the special requirements regarding liquidity?
Systemically important banks need to withstand liquidity outflows under stress scenario defined by FINMA for at least one month
→ Ensure minimal time frame for banks and authorities to initiate measures for dealing with liquidity crisis
