financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
9.3. What are the systemically important financial institutions (SIFIs)?
The definition of the systemically important financial institutions (SIFIs) is not
straightforward. This is because different countries have different set of regulatory
frameworks and respective institutions for this matter, as well as different level of banking
system development. Primarily, SIFIs can be defined from the microprudential and
macroprudential supervision perspective. From the microprudential point of view, an
institution may be qualified as a SIFI if its failure causes losses to its depositors, lenders
and other involved stakeholders, but the adverse effects are isolated to the value of the
transactions between the parties involved. On the other side, the macroprudential point of
view defines SIFIs as institutions that have important role on the economy, and their
failure would trigger repercussions into the overall financial system and impose costs in the
whole economy.
To determine whether a financial institution is may be considered as a SIFI, Weistroffer
(2011) provides two views. The first view considers SIFIs as relevant and indispensable
institutions for the wellbeing of the financial system and the economy. The second view
considers as SIFIs those financial institutions, whose malfunction has the potential to infer
high costs in the financial sector and transfer them into the real sector.
The concepts of systemic risk and SIFIs are closely related to the concept of contagion
effect. The contagion effect in the financial sector represents a propagation process which
may drag a simultaneous failure of several institutions or markets at the same time (De
Bandt and Hartman, 2000). For example, a failure of a relatively large bank with high
exposure on other banks may cause losses on assets and liabilities connected in the
interbank market. In effect, a default of a bank may cause the default of other banks
through interbank losses or liquidity losses which then may spread throughout the entire
financial sector (Iazzetta and Manna, 2009). Thus, if contagion happens, otherwise known
as the ‘domino effect’, it may simultaneously cause confidence loss in the financial markets,
consequently causing a bank run, interbank placement losses, drop in crediting the
economy etc. Hence, a breakdown of a substantial part of the banking system may follow,
consequently imposing high costs in the economy (Upper, 2010).
9.4. Why SIFIs are important?
Because the magnitude of the costs related with SIFIs in times of financial distress is
considered to be enormously high, as we have seen in the case of the global financial crisis,
governments and international institutions may interfere by bailing them out, in order to
prevent them from failing. However, since these institutions (e.g. banks) are may be aware
of their systemic importance in the economy, they may pose moral hazard problems. By
relying in the Given the probability that the government is likely to not let SIFIs fail, they
may engage in even riskier activities, thus contributing in increasing systemic risks even
more.
Understanding the nature and causes of systemic risk, as well as the role and impact of the
SIFIs in the economy is crucial with respect to creating appropriate regulations,
supervisory policies, and instruments that will help to avoid or at least mitigate the periods
with financial distress. Being able to identify SIFIs in real time, evaluating their potential
contribution into a systemic event and addressing them efficiently by taking a priory
corrective measures, may help to mitigate the potential risks generated by a system-wide
crisis, which may possibly be caused by them. Measures that may diminish the importance
of the SIFIs, as proposed by ESRB, are mainly counter-cyclical. For example, higher capital
requirements for banks during the booming times, less capital requirements in times of
recession, preventing maturity mismatch, limiting expectations of bail out, limiting the
exposure concentration (e.g. large exposure concentration), risk-based deposit insurance
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