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Resilience of the EU financial sector in the global context - Systemic risks in the insurance sector: key outcomes of the IAIS consultations

Impact of regulation on the SIFIs strategies to manage systemic risk

By Lemery Sandrine - First Deputy Secretary General, Autorité de Contrôle Prudentiel et de Résolution (ACPR)

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After 2008, the necessity to develop regulations specifically aimed at the Global systemic financial institutions led to a framework to identify lists of SIFIs and to adopt policy measures targeted to the SIFIs, including capital measures.

The aim of this framework is to prevent / reduce the risk of the systemic impact of a potential failure of a SIFI on the global financial system.

Group supervision, enhanced supervision, recovery plans, liquidity plans, resolution plans, and the setting up of Crisis Management Groups have a powerful role to play in sharing the awareness of the systemic risks between the SIFIs and the supervisors.

As important as this dialogue between SIFI and supervisors, the information resulting from these measures allows the management and the shareholders’ representatives (boards) to plan the actions to manage their systemic risks:

– On the one hand a SIFI might decide to review its business model in order to reduce or eliminate its systemic risk, and at some point disappear from the list of systemic institutions.

– On the other hand, a SIFI might consider that its systemic activities are an integral part of its business model, and manage systemic risks means complying with the regulation, but not substantially change its business model.

– The actual strategy of most SIFIs is probably to be found in between these two extremes: “shake-up” the business model or “business as usual”: SIFIs might want to arbitrage and review activities that are not the most profitable but are a significant source of systemic risk: in some cases, they might reduce their activities in these areas or stop them altogether.

The least that one can expect as an impact from the systemic policy framework is that on the longer term most of the largest players will “de-risk” from the activities that are the least profitable but with the most systemic impact.

In the current financial environment, the intensity, the rhythm and the global impact of this trend is not predictable yet, but one can see that several SIFIs go public about their policy to manage systemic risk.