Claudia Buch: Tackling too-big-to-fail banks - have the reforms been effective?

Remarks by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, at a Bruegel online discussion, virtual, 9 July 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Motivation

In the aftermath of the 2008 global financial crisis, the G20 endorsed a number of reforms intended to make the financial system safer. The Financial Stability Board is evaluating the "too-big-to-fail" (TBTF) reforms for systemically important banks (SIBs). The working group that is carrying out the evaluation has published a report for consultation on 28 June. The public consultation of the evaluation closes on 30 September and we would encourage responses from a wide range of stakeholders from the private sector, academia, and civil society.

Let's first recall the situation at the time of the 2008 financial crisis. Banks were weakly capitalised, resolution regimes for banks were missing, and taxpayers' money was often used to bail out banks. The expectation of government support acts as an implicit subsidy: it lowers the financing costs of systemically important banks and weakens market discipline because risks are not adequately priced. It creates incentives for these banks to take too much risk - we call this moral hazard.