What to Do about Systemically Important Financial Institutions

A researcher at the Federal Reserve Bank of Cleveland is proposing a three-tiered system for regulating systemically important financial institutions. Tier one would include high-risk institutions, such as large, interstate banks and multi-state insurance companies. Tier two would include moderately complex financial institutions, such as larger regional banks. And tier three would include non-complex financial institutions, such as community banks. Each would receive varying degrees of oversight and regulation.

What to Do about Systemically Important Financial Institutions

Three-tiered pyramid

One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines criteria for classifying firms as systemically important: size (the classic doctrine of too big to let fail) and the four C’s of systemic importance (contagion, concentration, correlation, and conditions); it also discusses the concept of progressive systemic mitigation.Read the Full Research Report or download the print-ready document.

Print Story

The term “systemically important financial institution” is all over the news these days. It refers to financial institutions that are so big, or interconnected, or unique that they pose a risk of taking down the entire financial system should they fail. Read more

Broadcast-Ready Scripts/Sound Bites

Use this broadcast-ready script and sound bite on the three-tiered proposal for addressing systemically important financial institutions.

  • Leveling the playing field and minimizing the advantages of systemically important financial institutions
  • James B. Thomson
  • James B. Thomson, Vice President and Financial Economist
  • | Script | Video |

The Drawing Board (Video)

Really bad drawings…real simple explanations

Three-Tiered Proposal on the Drawing Board

To help explain the proposal to people who aren’t policy wonks.