The Basel Committee on Banking Supervision has announced criteria for defining a “SIFI,” a Systematically Important Financial Institutiona bank “too big to fail”.

The financial regulators listed five criteria they believe will help identify financial institutions whose failure would threaten both the global economy and financial system.

Another way of saying this is that the regulators are trying to institute an early warning system so as to avert a Lehman Brothers 2.0.

 The five criteria are as follows: 

  • Size;
  • Inter-connectedness;
  • Global reach;
  • Complexity; and
  • Substitutability.

Financial institutions qualifying as SIFIs will be required to maintain higher reserves and be subject to more stringent supervision.

Obviously, this is but step one in a very complex process which will be highly contested by the financial institutions named as SIFIs who will remain intent to avoid an additional regulation and financial operating constraints.