As a result, the capital buffer for the more systemic firms should be higher based on size, complexity, interconnectedness, global exposure and substitutability, so that their expected probability of failure will be lower than for less systemic firms.1  1  New liquidity requirements such as the liquidity coverage ratio also work to reduce the risk of failure by giving firm management more time to address problems before a funding squeeze becomes acute. BIS central bankers’ speeches  5  The SIFI surcharge acts as a penalty for size and complexity, leaning against any remaining funding cost advantage that might remain for a large complex firm even after a viable resolution regime is in place. This should further level the playing field for smaller firms and reduce the incentive to become systemically important in the first place. However, I expect that it will take considerable time for the surcharge to have a meaningful impact on size and complexity. We also need to create new mechanisms and incentives for bank management to act early, well before resolution becomes necessary. Early intervention is likely to be much more successful in preventing failure as compared to last-ditch efforts. These actions can take many forms – cutting capital distributions earlier, raising new capital faster, restructuring businesses sooner, and reorganizing senior management and boards of directors more radically when the firm is not performing well. In this regard, the Comprehensive Capital Analysis and Review (CCAR) should bolster the incentives for early action.
Jean-Claude Trichet: Macro-prudential oversight and the future European Systemic Risk Board Keynote address by Mr Jean-Claude Trichet, President of the European Central Bank, at the European Banking Congress, Frankfurt am Main, 19 November 2010. *  *  *  Ladies and Gentlemen, It is a pleasure for me to participate in the European Banking Congress. We are meeting at a very important time for Europe’s financial system, of which so many senior representatives are assembled here. This is also a very important time for the European economy and for the governance of the euro area. Looking at the current situation, we have to be very clear as to what the issues are and where the solutions lie. As its name suggests, Economic and Monetary Union has two attributes: one is “Economic” and one is “Monetary.” The “Monetary” attribute refers to the ECB, its mandate and its independence. I will come to this in a moment. The “Economic” attribute comprises the fiscal regime enshrined in the Stability and Growth Pact; the national frameworks of economic policy; and the system of mutual surveillance. The developments we are currently witnessing in Europe’s economy have to do with its “Economic” functions. They have essentially three origins: unsound fiscal policies in a number of member states; inappropriate macroeconomic policies in a number of member states; and overall an inadequate system of surveillance by all member states. This is the triangle that provides the perimeter of the current situation.