Together with existing legislation that applies stays domestically, the ISDA agreement means that over 90% of the dealer banks’ OTC bilateral trading activity will be covered by either contractual or statutory stays. The second initiative is yet more significant. It is a proposal for a common international standard on the total loss absorbing capacity that globally systemic banks must have.6 It will ensure that shareholders and creditors who benefit in the normal course of business also absorb losses when banks fail. It will establish a level playing field between global systemic banks, while taking into account differences in national resolution regimes. It will set clear roles for home and host regulators in a resolution. And it will give host nations the confidence that they won’t again be side-swiped by the failure of a large foreign bank. It will ensure globally systemic banks finally have the quantum of total loss absorbing capacity that minimises the costs of an unsafe banking system. And, by removing the implicit subsidy that systemic banks have long enjoyed, it will re-establish market discipline. This proposal will of course be subject to public consultation and comprehensive impact assessments. Markets and rating agencies are already adjusting to the determination of authorities to end too big to fail. Credit ratings for globally systemic banks have been downgraded to reflect the much lower probability of state support.
The IMF concluded its latest Article IV Report noting that financial regulation and supervision here is “among the best globally and…a frontrunner in implementing global regulatory reforms”.25 Trust can be sustained only if all countries follow the example of Singapore to implement standards consistently, fully and in a timely way. To provide confidence that full and consistent implementation is taking place, the FSB will support that with rigorous and transparent peer reviews and implementation monitoring. We are providing clear and simple reporting, through the work chaired by Ravi Menon in our Standing Committee on Standards Implementation. In my letter to G20 Leaders last week, I provided that Committee’s latest findings of our monitoring process, in a simple summary with report card. 24  Chart 14, from Haldane (2014), shows the correlation between national savings and investment. That correlation had reached zero just before the crisis, suggesting that the global financial system was fully integrated. However, this has now reversed sharply. Sapir and Wolff (2013) document the home bias in equity markets even within the euro area. 25  IMF (2014b). BIS central bankers’ speeches  11  From next year, the FSB will further enhance this reporting, through an annual reporting process on implementation. This will seek to highlight both shortcomings and good practice, and will seek to assess whether reform measures are having unintended effects and must therefore be adjusted. The FSB’s work will include focus in particular on the effects in emerging markets.