If we were to decide that the existing state of affairs is not acceptable in financial stability terms, there are two broad paths we could follow. The first option would be to take steps to curtail the extent of short-term wholesale finance in the system. In principle, regulators across a broader set of institutions and markets could take steps to directly limit the use of short-term wholesale funding to finance longer-term assets, and take actions that reduced the amount of maturity transformation associated with securitization markets. In other words, regulators could require that a greater proportion of market-based finance be funded by longer-term debt. Alternatively, additional legislation or regulatory changes could be implemented to reduce the volume of wholesale-funded, capital markets activities. It is also true that some of the measures under debate in the area of limiting the scope of activity or the scale of certain financial institutions, three of which were explored by my colleague Federal Reserve Governor Dan Tarullo in a recent speech, would likely have the effect of reducing the use of short-term wholesale funding relative to the current status quo.17 For example, if regulators were to cap the size of a bank’s overall liabilities relative to gross domestic product (GDP) not only would this have the effect of capping the size of individual firms, but it also would likely limit the use of short-term wholesale funding by the largest institutions.
Both elements will mitigate the risk of financial fragmentation due to non-coordinated measures taken by the different authorities, namely, “ring fencing” initiatives. Spanish G-SIBs fully comply with the pre-conditions to be considered “Multiple Point” groups: they are organised through local retail banking subsidiaries; critical economic functions, e.g. payment systems, are organized at the local level; subsidiaries are selfsufficient in capital and funding; and they rely on separate firms detached from the bank for operational support, for instance, on information systems. So, although there are still many issues to be clarified, we think that the most realistic resolution approach for the Spanish international banking groups is the “Multiple Point” strategy, provided that, in the event of resolution, their organisational and financial structures are suitable for healthy parts to be sold or maintained as a surviving group, split from their distressed sister companies, using other resolution tools such as asset transfers or bridge banks. Now, I will go to the second main element of the new framework, the bail-in instrument. BIS central bankers’ speeches  3  Next year, most of the FSB work on resolution will focus on preparing proposals on the adequacy of G-SIFI loss absorbing capacity in resolution, namely, what we call “gone concern loss absorbing capacity” or GLAC. This concept is similar to the Minimum Requirement of Eligible Liabilities (MREL) set up in the EU Bank Recovery and Resolution Directive.