Tuesday, Jul 21, 2020
Evaluation of too-big-to-fail reforms
This discussion with Claudia Buch, Vice President, Deutsche Bundesbank; Chair, Evaluation of too-big-to-fail reforms working group, FSB, focuses on the recent FSB Consultation Report on too-big-to-fail reforms.
Read the full transcript
Demet Canakci:
Hello everyone. My name is Demet Canakci, I am a program director at Toronto Center. Thank you for joining us today. Today's session is not part of Toronto Center's pandemic series of webinars however it is devoted to a very important technical topic with global implications for financial stability. With COVID-19 consuming our attention for the past few months, most of us almost forgot about the 2008 global financial crisis. In the aftermath of the global financial crisis, the G20 endorsed a number of [inaudible 00:01:04] reforms intended to make the financial system safer. A core element of these reforms are policies that are addressing the Too Big to Fail reforms in order to reduce moral hazard and systemic risk. The financial stability board has been [inaudible 00:01:24] these reforms and as a result, they officially published their report for consultation on 28 of June. Today we are delighted to host Claudia Buch to talk about the main findings of the [inaudible 00:01:39] Group and issues to be addressed in the consultation report. You have received her bio so I will just very briefly introduce her. Claudia is Vice President of Deutsche Bundesbank and the chair of the [inaudible 00:01:54] of Too Big to Fail reforms working group. She also has a distinguished academic career.
Before I pass this over to Claudia, I want to thank our funders, Global Affairs Canada, the Swedish [inaudible 00:02:08], International Monetary Fund, [inaudible 00:02:11] Overseas Aid and [inaudible 00:02:14] and US Aid without whom we couldn't achieve our global mission. We have a great discussion ahead of us and look forward to your questions. Please use the Q&A pad to submit your questions during Claudia's presentation. It is now my pleasure to hand over the session to Claudia for her presentation. Enjoy the session. Over to you, Claudia.
Claudia Buch:
Thank you very much Demet, it's a pleasure to be here, although I'm not sure what here means. We're all in different locations. It seems like Toronto at this time of year would be a nice location to visit but I'm in Frankfurt and I'm very happy to be here. Also the virtual meeting form makes it possible for all of us to meet. I noticed that listeners are across the globe, I'm very happy also to get your feedback on what I'm going to talk about which is the evaluation of the Too Big to Fail reforms. What I would like to talk about today is the evaluation of Too Big to Fail reforms. I think you're all aware of what it means, what is the Too Big to Fail problem. It's basically about the issue that banks can become so large, so complex, so interconnected that their failure would cause harm to the financial system and to the economy. Because this problem exists, a lot of reforms have been implemented like Demet said, over the past 10 years to reduce the cost and the probability of a financial crisis. We have higher capital requirements for banks as a whole and in particular for the larger banks and for the more systemically important banks. Enhanced supervision, comprehensive resolution regimes and basically these Too Big to Fail reforms are supposed to address the systemic risk and the moral hazard associated with these banks.
Before going into the details of what this evaluation has done and I should say I'm just speaking on behalf of a whole team, a very dedicated team in the FSB, across the FSB countries that have done this evaluation, a lot of time and effort went into it starting early last year. This evaluation is part of a big project of the FSB evaluating the post-crisis financial reforms. As you know, these reforms has been agreed, the large body of it in 2009, right after the global financial crisis. Then it took some time to actually implement and design the reforms. Many of the Too Big to Fail reforms actually became effective in 2015, for instance with additional loss absorbing capital. Then the FSB and the G20 leaders said, "Well, we have to also find a way to also look at the effects of these reforms." To actually have a framework of how we want to assess, whether the reforms have reached their objectives and how can we look at this. There was a series of evaluations starting in 2017 on derivatives clearing infrastructure finance, SME finance. I'm sure, also, very relevant topics for people around this table here.
But what I wanted to talk about is the Too Big to Fail evaluation, which as I said, started the beginning of last year and the final report is due early next year. Now we're kind of in a very interesting phase because we have the results. I noticed that this webinar is actually on the pandemic, I must say I hope I'm not disappointing anybody that our evaluations started prior to the pandemic. We haven't taken the full effect of the pandemic into account but we thought that we had interesting insights which are also relevant for this space. Now it's a time for everybody to give feedback and to tell us what we have done, where we could improve our work. All that feedback during the consultation will also be part of the final report that we'll submit early next year. That's why it's interesting for us to get feedback from all of you and from all interested stakeholders.
Let me say a bit more how we're trying to tackle this issue that actually the objectives of the reforms, namely to reduce systemic risk, to reduce moral hazard. These are things we can't observe. There's no indicator, we can't go out and say, "Let's look at an indicator of moral hazard." All this is very indirect. This chart basically shows how we're thinking about the problem. Let's start with the left hand size, the choices of banks. Obviously banks, bank managers, owners take a lot of choices. Some of these choices are affecting systemic risk. The probability that a bank becomes distressed and then also the capital shortfall given that the bank is distressed. This, then, in case that happens, in case a crisis happens or a distressed situation happens in the individual banks, governments have to choose. They have to choose between bail outs, that was very often the route taken in the global financial crisis because there was no framework for dealing with larger, systemically important distressed banks or resolution. Clearly, what the reforms are trying is to tip the balance towards not bail outs but bail in, choosing resolution options and managing distressed banks.
This choice of governments in turn has implications for market perceptions of what we call implicit funding subsidies. The more likely a bail out, the higher is the implicit funding subsidy that systemic banks are enjoying. It's a mechanism that would be relevant at the national level in basically all countries but then the question is, of course, what are the affects on other countries, other markets? That's a perspective that the FSB is taking. What are the cross quarter implications of all this? This basically tells you how we've been looking at the Too Big to Fail to fail problem, how we've tried to assess the impact of the reforms maybe to see whether we do see changes and what banks are doing. Whether we do see changes in the risk of the financial system with the governments now have more tools to deal with distressed banks and whether this is actually leading to changes in market perceptions.
Before giving you the three main takeaways of the evaluation, let me also stress that usually you think about Too Big to Fail as being about the globally systemically important banks but as you see in the chart and this is basically the G20 countries, many countries have few or even none globally systemically important banks. But there are many, many domestic systemically important banks. They are also part of this evaluation. I come back to that because we know less about these banks in an international context then we know about the so-called GSIBS. Just to be aware, this is not just about the GSIBS but it's also about smaller banks, which is still very relevant at the national level.
What are the key findings? There are three of them. The first is that this indicators that I've talked about, about systemic risk and moral hazard, are really moving into the right direction. It [inaudible 00:09:49] a bit the second finding maybe that effective Too Big to Fail reforms actually bring net benefits to society. But we also find, of course this sounds very positive. It sounds like we are there and nothing remains to be done but this is actually not the case. We also find that there are gaps that still need to be addressed. For example, improving the resolvability of financial institutions. We found a lot of information and data gaps. I'll come back to that.
The first finding, these indicators of systemic risk and moral hazard. Why are we saying that they have improved? Well, the first is, there's actually a very easy to visualize graph, the capital rations of globally systemic banks and they have increased. That's clearly beneficial. This has also helped us tremendously in the pandemic situation because there were buffers in the system that banks could use to buffer shocks in the system. That's clearly a positive finding. That, actually, in and of itself implies that profitability of the systemically important banks has fallen relative to that of other banks. You very often hear the banks complain, maybe the owners of the banks complain that profitability has declined but we are actually saying this is positive from the point of society as a whole because higher capital means that return on equity declines. The reforms have also incentivized the banks to take on lower risk. We have higher funding costs because of the internalization of this implicit funding subsidy. All this leads to a decline in profitability, which may well be in line with the stronger resilience of the financial system, of the banking system.
All this is clearly positive. The third finding here is that lending has not declined. Many people feared that, well, if you increased capital requirements in particular in the short run this may mean that lending would decline. We haven't found that. We also haven't found that there are any other significant changes in the balancing structure of the systemically important banks compared to other banks. Maybe our measurement is not fine enough, maybe that hasn't actually happened. But also we find that the complexity of global banks remains quite high. In terms of choices of governments, failure of large banks has become less likely but should it happen, what can governments do or rather resolution authorities, what can they do? Clearly implementation of resolution reforms has made progress. We've actually constructed a resolution reform index going through a lot of FSB documents, national documentation. We even asked our members.
What we came up with is a resolution reform index that you see here on the left hand side. It basically gives you the legal implementation of resolution reforms following the FSB key attributes for resolution systems. You see that there has been a gradual improvement, there's much better systems now for the resolution and restructuring of distressed banks. That's clearly positive news. That's on the legal side. We have these institutions, we have the legal frameworks. Then of course the question is, to what extent is it actually implemented, are these reforms used, is it credible? I'll come to that in a second. What we also find is that total loss absorbing capacity has increased. That's the acronym TLAC is important here. What TLAC basically is, on top of the capital that the banks have the equity capital, there's a tier of debt that the banks have issued that can be bailed in case of distress. The GSIBS have to meet the final TLAC requirements by the end of 2022. Most banks already meet these final TLAC requirements. That's certainly good news, of course also reflecting for most of the time period we're looking at here, there's been a very benign market environment. The issuance was relatively small during this period.
That's good news in terms of feasibility of resolution. Is this considered to be credible? That's obviously a key question here. What we do find is that yes, implicit funding subsidies have declined. You can see this here. When you look at what we're doing here in this chart is we are comparing the funding costs of systemically important banks to those of other large non bank institutions, corporates, to other non bank financial institutions. No matter which metric you use or which comparison group you use, you see if you look at the post-reform period versus the period kind of in between the crisis and prior to the implementation of the reforms, the third part of this chart versus the middle part, then you see that the funding costs have fallen. That's good news in the sense that implicit funding subsidies are lower now than they were prior to the reforms. But you also notice that the crisis and the pre-crisis period, we are not necessarily below the pre-crisis period, to put it this way. There's a reform effect but comparing to longer time series there's not a big change.
I don't want to go into much detail here but we also have a lot of indicators that market discipline has improved. The markets are linking these funding subsidies more than they did prior to the reforms, to the actual underlying risk of the financial institutions. All of this is actually also good news from the point of whether the reforms are working. The second point or the second key finding, the benefits to society. There's obviously different ways of looking at the costs and benefits of these reforms. There's the private view, the private perspective. What would an individual bank, an owner of the bank say? Obviously what I've just been talking about, reduction in implicit funding cost subsidies, that actually means higher funding costs for the individual banks. The banks may say, "Well, this is not our ideal world. We were better off in a situation with lower funding costs." But of course, we have to take the point of social costs and benefits and what matters there is how likely is a bank to fail. How big is the potential loss to the taxpayer. These are the social benefits you see here on the right hand side.
Also from the social perspective, there might be costs. We might see a decline in lending. We might see if the banks pass through higher funding costs to their customers. We might see higher borrowing costs. We try to look at this in very different ways. What we basically find, I'll make this very short, the social benefits are higher. For the sake of time I won't go into the details of how we look at this but this is actually positive news, again from the point of view is it beneficial or not. There's a lot of detail on this in the report, let me just mention one aspect here. Clearly lending hasn't declined. We don't see that the ratio of credit to [inaudible 00:17:50] has fallen. What we do see is that there's been a shift in market share. You can see this in this chart here. The systemically important banks, they have reduced their market shares but there's other institutions that have come in. That's the yellow line here on the left hand panel. There you see of course market shares change slowly over time, you don't see big jumps in this time series. But if anything, the GSIBS and DSIBS, they have done less lending and other financial institutions and other banks have come in.
Does it mean, as I said before, that we are there? That there's nothing that needs to be done? Then we can just lay back and enjoy the benefits of the reforms? Well, that's not quite the message of this report. There are actually three main gaps that we think still need to be addressed. One is that there are still, even given what I've said about the improvement in resolution reforms, there's still obstacles to resolution that can be reduced further. We have seen even in the period under investigation that there has been some support for failing banks, resolution of central counterpart is also a key part of the FSB reform agenda is a work in progress. There's lots of, for now say details in terms of resolvability that we still need to work on and the FSB does do a lot of work. Information can be improved. Just to give one example, I've told you that we have more TLACs, more bail in capital in the banks now. We found it somewhat difficult to find out who are the holders of these TLAC debt issuance. That's, of course, important for the resolution authorities to decide whether or not they want to use the bail in option in order to understand what are the implications for the market. We think that actually all stakeholders would benefit from closing such information gaps.
Then monitoring can be enhanced. We know with every regulation there's effects on other market participants and risks have shifted from banks to non bank financials. Of course, we need to monitor this. We found it relatively difficult to get consistent information on these DSIBS, the domestically systemically important banks across countries. There's also work that needs to continue here. I'm sure people around this virtual table may have more ideas, have comments on the report. You may also have comments on whether we've drawn the right observances from what we've observed here. There's some opportunity to give feedback to the FSB. You see the email address at the bottom of this page, until the end of September. I hope that people have many other plans for the summer but I hope that some find also time to look into this and give feedback on the evaluation. Let me stop here and try to close the screen. I look forward to the discussion. Thank you very much.
Demet Canakci:
Thank you very much Claudia. That was very brief and excellent presentation. Thank you so much. We have some questions I would like to pose. First I would like to start the pre-submitted question because we received a couple of days ago. It's from our participant from Botswana. For a small economy like Botswana, where all the operating banks are subsidiaries of international banks, is the principle of Too Big to Fail appropriate? It continues, in principle, isn't it important that supervisor [inaudible 00:21:52] should manage the exit of any bank regardless of it's size?
Claudia Buch:
Thank you. That's a great question and makes me think I know very little about Botswana, not only about the banking system but also about the country. My apologies if I can't say anything specific about the country but I think the question that you raise is very representative for a lot of countries that may have a relatively small domestic banking system. Where there's activity of some internationally active banks. I would say this whole issue of Too Big to Fail is crucially important for countries, like I try to portray Botswana without knowing the details in the following sense. One is also domestically, there are banks that can be Too Big to Fail for the country, that have a high market share that can impose risks for the domestic financial system, for the domestic taxpayer. I think a lot of the issues that are part of the FSB attributes of how to deal with failing banks can be actually relevant for every country, even from an international perspective we could say where the banks in this country are not significant enough for the global financial system or there's not much cross border activity. I think it's useful for all countries to consider what does my local market structure look like and what are issues, if a large player in this market fails or is in distress.
That's one part of the answer. The second part of the answer is that I think precisely because smaller, emerging markets, countries that are less maybe at the focus of the FSB, precisely because there is global banks being active in this market, it's very important we have good resilience standards for the globally active banks because it might be very ... I mean, the activity of an affiliate of a globally systemically important bank in a smaller country may not be very important from the point of view of the large bank but it might be very important from the point of view of that country. That country wants to make sure there is an international [inaudible 00:24:10], that the global banks that are active in emerging markets that are sufficiently resilient, that there's a mechanism for dealing with the failure of these banks. We've actually seen many initiatives, there was for instance, in the global financial crisis there was the Vienna initiative in Europe, precisely in order to coordinate the activities of global banks so that they don't all of a sudden exit smaller markets with very high costs for these economies. I hope that answers the question.
There was also a second part of the question. If I understand that question correctly, I think in some sense, banks are different from other companies, nonfinancial firms in the sense that it's not that easy to just send a bank into insolvency. There's differences in terms of how to deal with a distressed bank compared to a distressed nonfinancial. But at the same time, there needs to be a mechanism for exit, like in any other market. The problem is that for smaller banks, it's sometimes easier to merge them with other institutions. We've actually seen, I can just speak about my own country because that's what I know best. We've seen that many, many very small banks have left the market. They've merged with other banks. I think for the smaller banks that are less systemically relevant, we do have mechanisms of dealing with these banks. Sometimes they are very institution specific but I think it's also important to consider what's happening with the larger banks and how to organize exit or the restructuring of larger banks that have lost business models. In that sense, I think it's important that we have known market mechanisms functioning also for banks but how exactly this operates different between smaller and larger banks. Let me stop here.
Demet Canakci:
Thank you very much Claudia. We have a lot of questions coming up. There's one general question, again I would like to start with that. What is your opinion on overregulation and all the timing of implementation of regulation or policies and their impact on systemically important banks?
Claudia Buch:
Well, first of all I think partly I've answered that question in saying that we are now being globally in a very distressed situation but not really first and foremost for the financial sector but for the real economy. We are really seeing the benefit of having implemented the post-crisis reforms. I think it's really important that we've done these reforms, that we have a higher resilience in the financial system. I think it's really important going forward to maintain that momentum and not to roll back reforms. I think that's the first part of the answer. At the same time, of course, we need to be aware that whenever you increase capital requirements there's the risk of deleveraging because of course the banks need time to comply with the new rules. That's why I think the regulators have been very careful to give sufficient lead time, to have a time period until full implementation is required. We always have to balance these longer term benefits versus the potentially short term costs. But what we find here is the long term benefits are clearly there. We also don't really find much evidence about these short term costs and short term credit, losses in credit, for example.
Demet Canakci:
Thank you Claudia. You mentioned in your presentation about this assessment being pre COVID-19. There are some related questions to that. For example, very interesting report and excellent presentation. Many thanks. You mentioned the timing of the report pre-pandemic. Will your group try to take account of pandemic related developments that could affect the Too Big to Fail question?
Claudia Buch:
Mm-hmm (affirmative).
Demet Canakci:
Also there is a related question to that saying if Too Big to Fail reforms successfully have authorities in preventing the bigger financial crisis due to COVID-19.
Claudia Buch:
Mm-hmm (affirmative), yeah, excellent questions. So far, in terms of the analytical work we haven't taken the COVID period into account simply because we would be running after the fact a little bit. It's hard to do the analytical work real time. All of our analysis basically stops February but that was according to plan. There's a process in the FSB and depending on when the deadline for the final report. We didn't change anything in our evaluation schedule. But we basically finished everything in February. The two key lessons that we take from this evaluation for the crisis period are twofold. One, I mentioned namely the better resilience that we have in the system so that the banks are better able to buffer the shock. The second takeaway from the evaluation is nobody knows what's going to happen. We have an extreme degree of uncertainty. Nobody knows how the real economy will evolve and how effective all the measures that have been taken to protect the real economy will be. But should there be cases where authorities have to deal with distressed banks, they now have much more options of doing so. We felt that this was also an important message to send.
But the report doesn't take any stand here. The report, obviously, can't say anything about [inaudible 00:30:20] policies and certain circumstances in a particular country. We're just saying there's higher resilience, there's more options now for the authorities. That's basically what the report can see. We do think that coming back to work in the fall and updating the studies there, there's some issues maybe the implicit funding subsidies, there could be something where we'll do some updates prior to issuing the final report. That hasn't been decided yet.
Demet Canakci:
Thank you Claudia. Another question, your group focused on GSIBS, risk based [inaudible 00:31:00] but did you also look at the leverage issues? Hasn't the progress in reducing leverage being slower for the big banks versus other banks?
Claudia Buch:
Good question, there was a small line in one of my slides with that information. In terms of the levels of capital, I talked about the changes. In terms of the levels of capital, we do see that there's difference in the leverage of GSIBS relative to other banks. Of course, there's many potential explanations for that. It may well reflect the risk of these banks that is lower. That's something that we still do see differences in the levels but the trends are clear. That's basically part of the regulation that the systemically important banks have to have higher capital and the capital requirements have increased by more.
I should say that in terms of, for many reasons but mostly in terms of data and also because many of the reforms that have been implemented have been implemented largely [inaudible 00:32:10]. There was a package of reforms and we found it very difficult to get really very detailed information on how did the reforms impact individual banks at a specific point in time. Everything we are saying is really about the whole package of the reforms rather than about what is the impact of increase the GSIB buffer, as it's called, versus changes in the leverage phase. In that sense, we can't really say anything about specific reforms. Also because some of the reforms I mentioned has intensified supervision are very qualitative. It's hard to really measure intensified supervision. We can say something about pre and post reform are the GSIBS different from and also the DSIBS different from other banks? But then it's hard to drill down any deeper.
Demet Canakci:
Thank you very much. The following question is, thank you Claudia, nicely done. In the final analysis, there appears to be a need to make policy changes to, for example capture [inaudible 00:33:20]. Won't the industry try to use the [inaudible 00:33:26] for lobbying purposes? How would the FSB respond?
Claudia Buch:
Welcome. Speak for the FSB because it's a large body and it's a structure.
Demet Canakci:
Say in your opinion.
Claudia Buch:
I know, that's fine. When they are saying there are gaps that need to be closed, we are not really talking about redoing or rethinking the overall approach to regulations. I think there's a very clear message that what has been done in terms of the overall package capture requirements, supervision, resolution reforms that that's the right package. There's nothing in the report saying this and that shouldn't have been done or should have been done differently. But at the same time, in particular the resolution reforms, this is really changing the institutional infrastructure of how to deal with failing banks. We have relatively short time period where we are learning how the new system is working. We should see these gaps in that sense. We are learning how the system is working. We are also learning whether it gaps but within the structure, the overall structure of the reforms that have been agreed upon. I don't think the report can be read as saying we should relax regulation or we should do different regulation but whatever stakeholders may view differently. But this is my expectation that it's clearly not saying that we should roll back the reforms or do things entirely differently.
Demet Canakci:
Thank you. Thanks so much for your clear and precise presentation. Could you tell us how [inaudible 00:35:13] committee and financial stability board will work closely to include these new regulations in the [inaudible 00:35:21]?
Claudia Buch:
We've actually worked very closely with the [inaudible 00:35:28] committee. There was a subgroup doing related work on DSIBS and GSIBS and the buffers. It was a very good cooperation. I should say that anything the FSB is doing here, like I said before there's no recommendations for policy changes. Basically all the relevant bodies, all the relevant standard setters can now take the report, look at it, go through it and see whether there is any need for changes. But then those changes should be discussed in the [inaudible 00:36:03] committee or in the respective bodies. It's not only the [inaudible 00:36:07] committee. Very close cooperation but no, we wouldn't interfere with the responsibilities of other committees. I think there's a very good division of labor here.
Demet Canakci:
Thank you. There is another one, you make a very good point about supervision and the more qualitative aspects of financial sector oversight. Sorry if you already mentioned this but has the report also looked at more intensive supervision? Could there be any recommendations in that regard?
Claudia Buch:
I hadn't mentioned it in detail, just a little bit in passing. The short answer is no in the following sense that we did not have four specific countries or even four specific banks information on how supervision has changed. We all know there's new principles for intensified supervision and there's also been a discussion the FSB has worked with many other bodies on how to improve this, how to make this operational. But we didn't have any information. I think nobody has. Whoever knows may correct me if I'm wrong. I don't think there's really a good database. I'm not talked about the analytics a lot here but what we need in order to really look at specific effects of reforms require some quantification of the reforms, like we tried to do with the resolution reform index. We don't have a similar database for improvements in supervision. I think that would maybe also be stretching quantitative analytical work too much. But of course, there's a lot of other work ongoing. We're citing this, that qualitative work compliments what we are doing here. But we are just looking at all this as a package if you will.
Demet Canakci:
Thank you Claudia. Two questions from the same participant, Fiona. I've just combined those. Considering that during the pandemic bail out are still needed, does this contradict with the ultimate objective of Too Big to Fail reforms? Also, she's asking do you consider this pandemic has revealed any weaknesses of Too Big to Fail reforms that the report has not covered? It was pre-pandemic but what was your general view on that? Thank you.
Claudia Buch:
The two questions, the first was about we have seen even in the past year, let's say since the global financial crisis we have seen cases where public money, taxpayers money has been used also to bail out or partially bail out financial institutions. This is often held against the overall, let me call it philosophical approach of these resolution reforms that the FSB and many national authorities have followed. I think that is to some extent, well I wouldn't say unfair but it's really trying to measure where we are against the perfect benchmark. What you have to take into consideration is that these reforms have taken time to be implemented so the final decisions on, for instance TLEC were taken in 2015. This is not a long time when you think about structured changes in the financial systems. Some of these cases that we've seen are rather specific, idiosyncratic cases. There weren't actually too many of those cases after the implementation of the reforms. Some already happened a bit earlier. I would hesitate to say because we have seen this isolated idiosyncratic cases this is telling us that the whole reform is not working.
What I find more plausible is to say, "Well, let's try to see how the reforms have been impacting all the GSIBS, all the DSIBS as a growing concern" because resolution reform, of course, is relevant once a bank is in distress. But it's even more relevant during the growing concern in terms of setting the right incentives and making sure that banks don't engage in too much risk taking. That's where we have much more evidence across a broader range of countries. That's where we've actually seen the effect of the reforms. Of course we can try and learn from individual cases to try and see to what extent they're representative for the system as a whole.
The second part of the question, does the pandemic reveal any fault lines? That's how I understood it. Did we learn through the pandemic that there's things that we're missing and we should have done? I would hesitate to make such a statement because we're still trying to understand the pandemic, the impact on the real economy. We're still trying to understand the effects of all the fiscal and monetary policy measures that have been taken in order to shield the real economy from the effects of the pandemic. I actually also doubt that we can draw these lessons until early next year. Our plan is to finalize before then and see whether there's anything that we still need to look into. Maybe that's for the next project.
Demet Canakci:
Okay, great. Another question, will it be possible to factor into your analysis the official sector measures taken by European Central Bank, Federal Reserve, Bank of England and others to provide stability? How would these measures also help the GSIBS?
Claudia Buch:
Yeah, from an analytical point of view clearly we can use basically all the analytical work that we have done and I actually haven't explained much what we have done. There's a lot of detail in the report. Basically for those familiar with the literature, take for example the literature on implicit funding subsidies. We've basically looked, first of all, what is available in the literature? Are there analytical approaches that are useful for us? Then we've replicated some of these studies because we found that a lot of evidence is not available for all the countries that we're interested in. I think it would be straightforward from an analytical point of view to again, take these studies and say, "No, let's not look at the impact of resolution reforms but let's factor in other macro economic developments" like the policies that people have mentioned, fiscal policies, monetary policies. That can be done.
We are very transparent about the analytical tools we are using, there's a long, technical appendix and we're citing the studies. Is this something that we are planning to do within the timeframe that we have? I guess not. I haven't discussed with my team but there will be another big effort to really update all the studies, taking into consideration the effects of these other policies. It's nothing, it's also not, more technically speaking, it's not in the mandate of this group to look at all this. But the analytical approaches, I'm sure people would find good ways of actually integrating also these other policy measures, yes.
Demet Canakci:
Thank you Claudia. I see many questions related to pandemic effects, maybe another webinar series to look at this issue. There is a different question, do you think there is any hope of creating a global regulatory [inaudible 00:43:50] straight [inaudible 00:43:53] available to all G20, Prudential Central Bank and securities authorities?
Claudia Buch:
That's a very specific question, what was this about the data trait, repository data. It's the derivatives traded on [inaudible 00:44:10]. Is that the idea?
Demet Canakci:
Yeah, I think that is what is meant. Not clear, but yeah.
Claudia Buch:
Yeah. We have made a lot of effort to get better data on trade repositories. I know there's a lot of projects here in Europe and my colleagues at the Bundesbank are also working with this data in the statistical community. There's also a lot of work, I know individual countries have collected their data. I think there's a lot of learning and information sharing, how to use this trade repository data. I must say I'm not aware of initiatives to combine all this into one major database. It seems a daunting task. I don't know. I think at the current juncture we're trying to use and learn how to use the information that we have available. Maybe it's less about integrating everything into one database but learning how to use this database in sharing experience. Maybe that's the more promising route to take.
Demet Canakci:
Thank you. I also see some questions in the chat box, I'm going to pick one of those. Is there as much progress towards a level playing field? In other words, are all countries addressing the Too Big to Fail issue appropriately? Or which countries need to do more? Perhaps we cannot mention the names of the countries, but I don't know, I'll leave it to you.
Claudia Buch:
Yeah, I can't name countries. That's also not the purpose of this type of evaluation work. As you know, the FSB is also doing peer reviews where they engage very closely with national authorities. That's, I think, the forum or the channel through which this kind of country specific recommendation should be conveyed. What we are doing here, you can look at the data, let me take this resolution reform, index the information on the resolution reform index in the appendix of the report. You can actually download from the FSB website. You do see differences in implementation across countries and that's what the report is saying. That these gaps between full implementation where the countries are right now, these gaps should be closed. That's one of the things that I mentioned earlier. We very well understand that it can be very difficult politically to implement these reforms. I wouldn't even, for the countries where you see a gap I wouldn't say that they haven't made enough effort, it may just be very difficult nationally. But of course we should all aim at following the same standard and the same principles. This is what the FSB work is about.
Does that necessarily mean all countries have to do exactly the same thing? That's sometimes what you hear, we are only living in a well regulated financial global system if everybody is doing the same. Well, not necessarily. There might be important country specific features that you have to take into conservation when designing regulation. I think this is not where international bodies can say a lot but it's important that wherever cross water effects are relevant, where there's externalities, that we then follow a same, coordinated approach to make sure coming back to the first question, to make sure that also smaller countries, emerging markets can rely on a coordinated global system. I think that's very important. Coordination where it's needed and appropriate but national approaches wherever there's need for it.
Demet Canakci:
Thank you Claudia. Another question for you. To what extent does the concept of Too Big to Fail and emerging reforms apply to other financial institutions such as the insurance and capital market sector or group?
Claudia Buch:
Not the focus of this evaluation, obviously. There's a lot of discussion to what extent can other institutions also be Too Big to Fail. I think there are two answers to this question. One is, of course banks and insurance companies, to give that example, they have different business models. When you do classification of banks as being systemically important that would be different for insurance companies. I think it's important to take these differences into consideration. Clearly there's one set of institutions, the CCPs, the central counterpart is they are to some extent systemically important by definition because we want derivatives to be traded on central tech forums and not just over the counter where it's very difficult to supervise and to monitor. This is why the report is saying that in particular for the central counterpart is we also have to make progress with defining resolution systems, implementing resolution reforms. That's one of the areas where we see a need for action, also.
Demet Canakci:
Okay, thank you very much. I have a follow up question, what is the next steps in terms of, what happens after September 30th when you receive all those comments, feedback from your audience?
Claudia Buch:
Okay, well first of all when we come back from the summer break we are all relaxed and eager to do more work. We will look at all this. First of all, maybe that's interesting, we also do a lot of outreach like this type of event but we also organize workshops with stakeholders. We'll have another workshop with stakeholders and get feedback from them having discussions of the report. That will be in early September. Then we all come back from our summer holiday. We look at this feedback, actually the feedback will be posted on the FSB website. Anyone who wants to see it, read it, can do so. We'll go through it, we will see to what extent there is feedback that we need to take into consideration when drafting the final report, to what extent there is additional sources we have to cite. Then there might be very targeted updates of the analytical work, like I mentioned earlier. We haven't discussed exactly what this will be. We have to finish that, also, in the third, fourth quarter of this year. That gives us a somewhat limited timeframe. There will be targeted updates and just seeing where we've misrepresented some evidence. There's actually a whole set of consultation questions which kind of gives you the type of information we would want to have to improve the report and to publish the final report.
Demet Canakci:
Sounds like you have a lot of work to do in the coming months or perhaps a year or so. It must be really hard to assess the impact of such reforms to [inaudible 00:51:28] those. Big congratulations to the FSB team and your working group. I have a different question as a closing. I know you are very busy so we won't take your time. I apologize for the rest of the participants we won't be able to answer all the questions but I appreciate your enthusiasm in joining us today. This is totally different than our team. We don't really see many female leaders accomplish so much like yourself even in the century. I was wondering what piece of advice would you give to young women who are at the early stages of their careers?
Claudia Buch:
Interesting question, very different from the Too Big to Fail question. To some extent, I think the advice I give, also in my previous life working as an academic and having PhD students, I think the advice I gave was not that different for male and female students. One of the first pieces of advice I always give is whatever you choose and whatever you do, do things that you enjoy. I think trying to pursue a career for the sake of pursuing a career, I think that's never a very good choice. Do things that you actually enjoy and that you feel like, "This is something I could do for the next 10 years." Maybe even longer. The second point is one shouldn't shy away from challenging tasks. Maybe that's, I don't know, if there's a gender balance or differences across gender types there but I think very often you learn, that's what I've learned, that things that seem very difficult or too complicated a task, after doing it several times it was actually easier. There was a learning effect. I think that's important. Try to put the bar maybe not too high that you can't cross it but be ambitious. I think that's very important.
The third thing is, work with others. I think in particular in academia, where I'm coming from, there was for a very long time, cooperation interaction wasn't really much appreciated. I think this has also changed over time. Working with others I think has two beneficial effects. Usually it's more fun and that's important. You should enjoy what you're doing. It also helps building networks and interacting with others, learning how to make compromise. I think that's very important if you want to make it wherever, in academia or in a more policy oriented organization like ours. Maybe these three pieces. I think they hold across gender but maybe they are particularly important for women in policy making or academic.
Demet Canakci:
Thank you Claudia. That was great advice, very good. Also just to attach to our theme today, Too Big to Fail, perhaps never be scared of failing, I guess.
Claudia Buch:
Yeah.
Demet Canakci:
Keep going [inaudible 00:54:54]. Thank you very much, it was a great pleasure having you today. We appreciate your time spending with us today. A big thank you to our participants for their support. Hope to see you again in another Toronto Center event. Let's keep in touch and thanks again. Bye everyone.
Claudia Buch:
It was fun, thanks for listening. Thank you. Bye bye.
Demet Canakci:
Thank you bye bye.