The key policy objectives of the FSB SIFI framework are to (i)  increase their loss absorption capacity to reduce the likelihood of their failure,  (ii)  to facilitate the orderly restructuring or unwinding of a failing SIFI to reduce the impact of its failure on the financial system (“living will”);  (iii)  to intensify supervisory oversight for SIFIs;  (iv)  to strengthen core financial market infrastructures to reduce contagion risk from failure.2  Challenges imposed by liquidity rules Though it is highly welcome that the new rules tackle liquidity risks, the new requirements for liquidity management could themselves become a source of instability.
One reason is that the regulators’ definition of liquidity is highly concentrated on government bonds. As the current environment shows, some market segments of government bonds can eventually dry up. Another reason is the respective definitions of the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR). –  The LCR is the main component of Basel III’s liquidity regime.