London and Washington DC, May 24, 2010 — Critical decisions on global financial regulatory reform that will be taken in coming months need to reflect an integrated approach to systemic risk, which recognizes the major benefits to the international economy of systemically important financial services firms, stressed the Institute of International Finance (IIF) in a report to regulatory authorities.

The IIF, the leading global association of financial services institutions with 400 members, underscored the importance now, at a time when regulatory reform proposals are being made at national and multilateral levels, that building a coherent overall cross-border framework is essential. The IIF said systemic risk is complex, fast-moving, and unpredictable and addressing it requires the combination of enhanced regulation, sound industry practices, strong supervision, and efficiently functioning markets.

Mr. Charles Dallara, IIF Managing Director, said, "The financial industry's leadership is convinced that we must work closely in the period ahead with the policy makers to address core issues of systemic risk. This calls for sophisticated, not simplistic approaches. These issues need to be addressed on the basis of close international coordination with the goal of building a more robust international regulatory framework."

The report is published at a time when proposals have been made to break-up large financial institutions, restrict their activities, or impose special taxes or capital requirements on such firms. Mr. Dallara, said, "Many of these proposals do not address the underlying factors of systemic risk. Size may be a factor in some cases, but size alone is not a determinant of systemic risk. Large global financial services firms bring enormous benefits to the international economy and these could well be lost if regulatory policies focus excessively on limiting the scale or scope of these firms."

The report includes a series of case studies drawn from the IIF's global membership designed to illustrate the benefits of large, cross-border financial firms. The case studies show that these firms are uniquely positioned to provide the range of services needed by global corporations to improve their performance; facilitate access to finance at the best price by both corporations and governments; and optimize the benefits of large-scale operations to enhance services to their full spectrum of clients. In addition, their geographic scope allows them to export improvements from one market to another to the benefit of their customers.

Mr. Peter Sands, Group Chief Executive of Standard Chartered, Plc, who is the Chairman of the IIF's Special Committee on Effective Regulation (SCER), which developed today's report, said, "We have concluded that suggestions to limit the size of firms should not be adopted. Such an approach is not risk sensitive and thus will cause unforeseen negative effects. Reforms need to take into account risks related to interconnectedness and substitutability, which can arise in small firms as well as in large. We believe no firm should be seen as -˜too big to fail'. We do not consider it appropriate to impose additional regulatory capital requirements on firms because of their size, or to adopt formulaic approaches for applying capital surcharges."

The IIF report said proposals to restrict the activities of deposit-taking firms are ill-conceived. Systemic risk does not arise only from deposit-taking firms. Recent examples show that nondeposit-taking firms can also be a source of systemic risk. Imposing stringent restrictions on a particular category of firms will simply cause the risk to mutate and go elsewhere in the system. Trading book capital requirements, for example, reflecting the risks of the activities are a far more effective way of addressing concerns.

The report noted that key to addressing systemic risk in a manner that does not rely on inefficiently high regulatory requirements is finding effective ways to resolve issues related to "too big to fail." The IIF also published a report today on this specific issue - Towards a Global Approach to Resolving Failing Financial Firms: An Industry Perspective.

A key theme of the present report is the importance for firms themselves to act to strengthen their own procedures and sound performance and the report notes that significant improvements have been made in many areas. The report also underscored the key role that supervision needs to play in embedding improved industry practices for the long term.