Systemically Important Financial Institutions (SIFIs): An Analysis of Current Regulatory Developments

The primary objective of this paper was to examine systemically important financial institutions and some important themes in their regulation. In doing so, an attempt has been made to discuss SIFIs' indicators and distortions, proposals presented for their regulation, and international reforms adopted in response to SIFIs. It is crucial to recognize that no single policy change will be adequate to address the systemic risk, nor will be any immune from potential drawbacks. A combination of measures is, therefore, necessary to mitigate the externalities posed by SIFIs. Furthermore, policy changes in response to SIFIs cannot enhance global financial stability unless they are coordinated internationally. Uncoordinated policies are vulnerable to regulatory arbitrage and cannot be effective in the long run. Distorted incentives created by some derivative products, largely unregulated shadow banking systems; vulnerability of asset risk-weighting to regulatory arbitrage, the critical importance of the timely implementation of reforms, and lack of sanctions for recommended policies are all among the issues that require urgent attention of global policy makers. If they remain unaddressed, the real impact of the current reforms and their ability to prevent another financial crisis will be significantly limited.