Question

What is a SIFI? Explain the economic forces leading to the generation of SIFIs. (I expect about 2 well developed paragraphs here.)

Answer 1

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. However, a SIFI label brings more scrutiny and extra regulations.The Concept of a systemically important financial institution in the U.S extends well beyond traditional banks and is often included under the term Non-Banking financial Company.

Economic Forces:

Market relevance test:

The rationale behind the firest test is that a SIFI is assumed to have global market relevance and therefore a leading position in most of its core markets. Depending on the business model and product offering, global market relevance could either be reflected by leading position in global market or in multiple local markets, provided that the geographic footprint covers all major economic regions.

Risk Potential Test:

The rationale behind the second test is that the level of risk of the entire business activities of a SIFI must be high enoughto constitute a substantial part of the overall risk potential associated with the largesr worldwide financial institution.The risk categories that are considered are market risk, credit risk,Operetional risk,Liquidity risk and insurance risk.

Interconnectedness Test:

The rationale behind the third test is that the failure of a SIFI could, due to its size and interconnecedness, trigger defaults of other financial institutions and/or substantial losses for its shareholders or institutional and private debt holders to an extent that trust in the stability of the global financial system would be endangered,potentially leading to disruption in global financial markets.