Question

Do the existence of SIFIs represent a threat to the ecnomic stability of the country? Why or why not? Explain how the post great-recession regulations tried to deal with this issue.

Answer 1

DEFINITION:

A systemically important financial institution (SIFI) is a bank, insurance or other financial institution that U.S. federal regulators determine would pose a serious risk to the economy if it were to collapse. A SIFI is viewed as “too big to fail” and oposed with extra regulatory burdens to prevent them from going under. However, a SIFI label brings more scrutiny and extra regulations.

Financial institutions show a characteristic risk exposure and vulnerability, making them prone to instability. Financial systems in Latin America, however, were left largely unscathed by the global financial crisis starting in 2008. This state-of-the-art survey provides an in-depth analysis on the identification and regulation of systemically important financial institutions (SIFIs).

While Latin America benefits from its rich historical experience in managing systemic risks, we find the problem of SIFIs to be still underestimated. However, there are first efforts to cope with SIFIs in science and particularly Latin American supervisors and regulators are starting to take the threat posed by SIFIs seriously.

POST GREAT RECESSION REGULATION:

Presidents George W. Bush and Barack Obama signed into law several major legislative responses to the financial crisis of 2008. The most influential and controversial of these was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced a raft of measures designed to regulate the activities of the financial sector and protect consumers. Another notable law was also the Emergency Economic Stabilization Act, which created the Troubled Asset Relief Program (TARP). Moreover, the Federal Reserve took up many new and additional measures of its own.

KEY POINTS

A systemically important financial institution (SIFI) is a firm that U.S. regulators determine would pose a serious risk to the economy if it were to collapse.

• This label imposes extra regulatory requirements and increased scrutiny, including strict oversight by the Federal Reserve, higher capital requirements, periodic stress tests, and the need to produce "living wills."

• Last year, President Donald Trump signed a bill to pare back parts of the Dodd-Frank Act, raising the threshold that determines which companies qualify as a systemically important financial institution (SIFI).

• The changes should see many mid-sized FIs save millions in regulatory compliance costs and give them greater flexibility to expand their businesses

Causes of the Great Recession

Many factors directly and indirectly caused the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and following recession include the Federal Reserve lowering the Federal funds rate and creating a flood of liquidity in the economy, international trade imbalances, and lax lending standards contributing to high levels of developed country household debt and real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions.

Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

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