Appendix: G-SIB Regulatory and Supervisory Regime

Andrea Cremonino

This article was first published as a chapter in Managing Systemic Exposure, by Risk Books.

All banks are equal, but some banks are more equal than others¹¹Author’s adaptation from George Orwell, “Animal Farm”

The regulatory response to the fallout from the Lehman Brothers’ default and ensuing wave of costly bank recapitalisation has followed two main lines. On the one hand, there was a tightening of risk measures (the so-called Basel 2.5), a stricter definition of capital and the increasing of capital requirements supplemented by binding rules for liquidity (Basel III). On the other hand, there was an explicit identification of the financial institutions that were considered “systemically relevant” and should be made less prone to default; if they did default, it was crucial that they did so without recourse to taxpayers’ money and with minimal disruption to the financial markets. There was a dawning recognition of the threat to financial stability from interconnectedness among financial institutions as a prime contagion mechanism for the crisis.

This initiative was led by the Financial Stability Board (FSB), tasked by the G20. In November 2011, the G20 endorsed the “Key