Claudia Buch: ‘We need higher transparency’ on resolution

Data gaps and limited transparency continue to hamper ‘too big to fail’ (TBTF) reforms implemented in the wake of the 2008 crisis, says Claudia Buch.

Regulators are gathering a lot more data than they once were, but the picture is still incomplete, the Deutsche Bundesbank vice-president warns in the video interview. “We’ve found along the way a lot of areas where information and transparency can be improved,” she says. “We need higher transparency.”

Part of the challenge is making better use of information that is already available. “We have a lot of information – we improved our information since the crisis – it is more a matter of making this available and sharing it also with others,” Buch tells Central Banking.

Buch is leading a Financial Stability Board investigation of post-2008 TBTF reforms. A consultation report published in late June highlights considerable progress on loss-absorbency standards, tougher supervision and better resolution planning.

Capital ratios are “almost double” their pre-crisis levels, says Buch, and they are supplemented by rules on total loss-absorbing capacity (TLAC) – debt that can be bailed in, becoming equity if a bank is close to failing. The funding advantage that the largest banks used to enjoy has eroded. Rating agencies now view state bailouts as less likely, though there have been exceptions; the Italian authorities rescued a lender in late 2019.

Some developments since 2008 bring both pros and cons. The FSB report notes that where big banks have stepped back, smaller banks and non-banks have picked up the slack. While this means the TBTF reforms have not caused a slump in credit, it does mean less-regulated and less-monitored non-banks are now playing a bigger role.

Buch argues it is broadly a good thing that other firms have stepped in, but says regulators need to work on understanding how risk is migrating across the financial system. “First we have to do the analytical work,” she says. “That is an area where we could improve our information base; we know much more about the banks because they are much more tightly regulated.”

Fragmented markets?

Another much-discussed area of the TBTF reforms is the question of fragmentation, which breaks down into two key issues.

Firstly, have banks pulled back from certain jurisdictions? Buch says there is some evidence of this in Europe, but she argues that, overall, the evidence of fragmentation is limited.

Secondly, are the rules segmenting markets? Rules on internal TLAC stipulate that loss absorbency must be distributed throughout a banking group to the places it may be needed in a crisis. If resources are locked up in certain subsidiaries, that could be seen as impeding the efficient flow of finance.

Buch responds: “To some extent that’s in the regulation, if you’re asking to have this internal TLAC, that is segmenting markets, but the question is: what’s the benchmark? Is the benchmark really the perfectly integrated market, or wouldn’t the benchmark without this regulatory guidance be that everyone will be trying to hoard more liquidity to make sure you don’t run into difficulty during times of crisis?”

Furthermore, there are likely aspects of the pre-crisis world that supervisors are keen not to replicate. “Perhaps prior to the crisis we also had a bit of excessive cross-border activity, so seeing some withdrawal is not bad from a social point of view,” Buch says.

Covid shock

The report was finalised as the initial Covid-19 market stresses were tailing off, but the analysis was completed before the pandemic broke out. The FSB chose to release the report in an effort to weigh up the financial system’s resilience.

The report says little on the effects of the pandemic and the FSB is expected to revisit the analysis once the stresses subside. Nevertheless, so far, the evidence looks good, says Buch: “Certainly what we are seeing is the improved resilience is helping to buffer the shock”.

The report is currently open for comment. The consultation period runs until September 30, and the FSB plans to release a final report in early 2021.