Systemically important financial institution


A systemically important financial institution is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as "too big to fail".
As the 2008 financial crisis unfolded, the international community moved to protect the global financial system through preventing the failure of SIFIs, or, if one did fail, limiting the adverse effects of its failure. In November 2011, the Financial Stability Board published a list of global systemically important financial institutions.
In November 2010, the Basel Committee on Banking Supervision introduced new guidance that also specifically target SIFIs. The focus of the Basel III guidance is to increase bank capital requirements and to introduce capital surcharges for G-SIFIs. However, some economists warned in 2012 that the tighter Basel III capital regulation, which is primarily based on risk-weighted assets, may further negatively affect the stability of the financial system.
The FSB and the BCBS are only policy research and development entities. They do not establish laws, regulations or rules for any financial institution directly. They merely act in an advisory or guidance capacity when it comes to non G-SIFIs. It is up to each country's specific lawmakers and regulators to enact whatever portions of the recommendations they deem appropriate for their own domestic systemically important banks or national SIFIs. Each country's internal financial regulators make their own determination of what is a SIFI. Once those regulators make that determination, they may set specific laws, regulations and rules that would apply to those entities.
Virtually every SIFI operates at the top level as a holding company made up of numerous subsidiaries. It is not unusual for the subsidiaries to number in the hundreds. Even though the uppermost holding company is located in the home country, where it is subject, at that level, to that home regulator, the subsidiaries may be organized and operating in several different countries. Each subsidiary is then subject to potential regulation by every country where it actually conducts business.
At present there is no such thing as a global regulator. Likewise there is no such thing as global insolvency, global bankruptcy, or the legal requirement for a global bail out. Each legal entity is treated separately. Each country is responsible for containing a financial crisis that starts in their country from spreading across borders. Looking up from a country perspective as to what is a SIFI may be different than when looking down on the entire globe and attempting to determine what entities are significant. The FSB hired Mark Carney to write the report that coined the term G-SIFI for this reason in 2011.

Definition

As of November 2011 when the G-SIFI paper was released by the FSB, a standard definition of N-SIFI had not been decided. However, the BCBS identified factors for assessing whether a financial institution is systemically important: its size, its complexity, its interconnectedness, the lack of readily available substitutes for the financial market infrastructure it provides, and its global activity. In some cases, the assessments of experts, independent of the indicators, will be able to move an institution into the N-SIFI category or remove it from N-SIFI status.

Banks

Global Systemically Important Banks are determined based on four main criteria: size, cross-jurisdiction activity, complexity, and substitutability. The list of G-SIBs is published annually by the Financial Stability Board. The G-SIBs must maintain a higher capital level – capital surcharge – compared to other banks.
As of November 2025, the FSB updated the list of G-SIBs, and the following 29 major banks were included :
The following 8 banks were removed as a result of a decline in their global systemic importance:
Banks in Japan deemed systemically important are stress tested by the International Monetary Fund. Banks in China are mostly state run and are stress tested by the national banking authority.

United States

Stress testing

In the United States, the largest banks are regulated by the Federal Reserve and the Office of the Comptroller of the Currency. These regulators set the selection criteria, establish hypothetical adverse scenarios and oversee the annual tests. 19 banks operating in the U.S. have been subject to such testing since 2009. Banks showing difficulty under the stress tests are required to postpone share buybacks, curtail dividend plans and if necessary raise additional capital financing.

G-SIB capital requirements

In December 2014, the Federal Reserve Board issued a long-awaited proposal to impose additional capital requirements on the U.S.’s global systemically important banks. The proposal implements the Basel Committee on Banking Supervision’s G-SIB capital surcharge framework that was finalized in 2011, but also proposes changes to BCBS’s calculation methodology resulting in significantly higher surcharges for US G-SIBs compared with their global peers. The proposal has not been finalized, and leading experts such a PwC believe it will be finalized in 2015.CN
The proposal, which industry experts expect will be finalized in 2015, requires U.S. G-SIBs to hold additional capital as a percentage of risk-weighted assets ) equal to the greater of the amount calculated under two methods. The first method is consistent with BCBS’s framework, and calculates the amount of extra capital to be held based on the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method is introduced by the U.S. proposal, and uses similar inputs but replaces the substitutability element with a measure based on a G-SIB’s reliance on short-term wholesale funding.

Market-based bank capital regulation ERNs

Stress testing has limited effectiveness in risk management. Dexia passed the European stress tests in 2011. Two months later it requested a €90 billion bailout guarantee. Goldfield, a former Senior Partner of Goldman Sachs and Economics Professors, Jeremy Bulow at Stanford and Paul Klemperer at Oxford, argue that Equity Recourse Notes', similar in some ways to contingent convertible debt,, should be used by all banks rated SIFI, to replace non-deposit existing unsecured debt. "ERNs would be long-term bonds with the feature that any interest or principal payable on a date when the stock price is lower than a pre-specified price would be paid in stock at that pre-specified price." Through ERNs, distressed banks would have access to much-needed equity as willing investors purchase tranches of ERNs similar to pooling tranches of subprime mortgages. In this case, however, the market, not the public takes the risks. Banking can be pro-cyclical by contributing to booms and busts. Stressed banks become reluctant to lend since they are often unable to raise capital equity through new investors. claim that ERNs would provide a "counterweight against pro-cyclicality."

Resolution plans

The Dodd–Frank Wall Street Reform and Consumer Protection Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve submit resolution plans annually to the Federal Reserve and the Federal Deposit Insurance Corporation. Each plan, commonly known as a living will, must describe the company's strategy for rapid and orderly resolution under the Bankruptcy Code in the event of material financial distress or failure of the company.
Starting in 2014, category 2 firms will be required to submit resolution plans while category 1 firms will submit their third resolution plans.
The resolution plan requirement under the Dodd Frank Act in Section 165, is in addition to the FDIC's requirement of a separate covered insured depository institution plan for CIDIs of large bank holding companies. The FDIC requires a separate CIDI resolution plan for US insured depositories with assets of $50 billion or more. Most of the largest, most complex BHCs are subject to both rules, requiring them to file a 165 resolution plan for the BHC that includes the BHC’s core businesses and its most significant subsidiaries, as well as one or more CIDI plans depending on the number of US bank subsidiaries of the BHC that meet the $50 billion asset threshold. Similar to the assumptions made for resolution plans, the FDIC recently issued assumptions to be made in CIDI plans including the assumption that the CIDI will fail.
Qualified financial contracts
When a company enters insolvency, an automatic stay is triggered that generally prohibits creditors and counterparties from terminating, offsetting against collateral, or taking any other mitigating action with respect to their outstanding contracts with the insolvent company. However, under US law counterparties to qualified financial contracts are exempt from this stay and may usually begin to exercise their contractual rights after the close of business the next day. In case of receivership, the FDIC must decide within this time period whether to transfer the QFC to another institution, retain the QFC and allow the counterparty to terminate it, or repudiate the QFC and pay out the counterparty.
In January 2015, the US Secretary of the Treasury issued a notice of proposed rulemaking that would establish new recordkeeping requirements for QFCs. The NPR requires US systemically important financial institutions and certain of their affiliates to maintain specific information electronically on end-of-day QFC positions and to be able to provide this information to regulators within 24 hours if requested. The NPR is intended to help the FDIC with decision-making by making available detailed information on a failed company’s QFCs, given the FDIC’s expanded receivership powers under Dodd–Frank’s Orderly Liquidation Authority.