Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help? By Jose Vinals, Ceyla Pazarbasioglu, Jay Surti, Aditya Narain, Michaela Erbenova, and Julian Chow
IMF Staff Discussion Notes No. 13/4
May 14, 2013
Summary: The U.S., the U.K., and more recently, the E.U., have proposed policy measures directly targeting complexity and business structures of banks. Unlike other, price-based reforms (e.g., Basel 3 and G-SIFI surcharges), these proposals have been developed unilaterally with material differences in scope, design and implementation schedules. This may exacerbate cross-border regulatory arbitrage and put a further burden on consolidated supervision and cross-border resolution. This paper provides an analysis of the potential implications of implementing different structural policy measures. It proposes a pragmatic and coordinated approach to development of these policies to reduce risk of regulatory arbitrage and minimize unintended consequences. In doing so, it also aims to identify a set of common policy measures that countries could adopt to re-scope bank business models and corporate structures.
Structural constraints on banks proposed by a number of countries aim to address the too-important-to- fail problem by reducing the risk that these institutions will fail and by simplifying their resolution if they do fail.
Structural measures can contribute to financial stability in combination with enhanced, post-crisis price-based regulations, supervision, and cross-border bank resolution frameworks. Activity restrictions, when appropriately designed and judiciously implemented, can work in tandem with strengthened capital requirements to limit bank management’s capacity for excessive risk taking. Corporate structures aligned to business activities and limits on intra-group exposures and on their pricing can shield systemically important financial services from idiosyncratic shocks impacting other activities. The nations proposing structural banking reform are global financial centers and systemically important economies. By enhancing financial stability in these countries, such policies can have positive spillovers on the global economy and financial system.
Nevertheless, our analysis suggests that these policies will also have potentially significant global costs given that they will be imposed on internationally active and systemic financial institutions. Our assessment points to the need for a global cost-benefit exercise encompassing extra-territorial implications of structural measures. This is necessary to determine whether the benefits of structural measures match or exceed costs at the global level; it would be difficult to justify them otherwise.
Subjecting a global institution to different structural measures in different jurisdictions could exert further pressure on consolidated supervision and cross-border resolution. Our view is that, with firm political support, a “targeted” approach—with structural measures tailored to the specific risk profiles of individual banks at a global group level—would promote global financial stability more effectively than an across-the-board approach. However, absent sufficient confidence in the supervisory capacity to design and forcefully implement the targeted approach, across-the-board measures would be appropriate provided their global benefits exceed their costs.