What is a systemically important financial institution?

A systemically important financial institution (SIFI) is a financial institution whose failure could pose a threat to overall financial stability. The Dodd-Frank Act of 2010 recognised the part these firms played in the 2008 financial crisis and addressed gaps in the regulatory system to allow for their more effective supervision.

Where have you heard about a systemically important financial institution?

You might not have heard of a systemically important financial institution (SIFIs), but you’ll certainly have heard the phrase ‘too big to fail’. When governments intervened to stabilise financial institutions at the height of the 2008 financial crisis, it was assumed that these firms were too important to allow to fail.

What you need to know about a systemically important financial institution.

Along with ‘too big to fail’, you’ll have heard the phrase ‘moral hazard’ associated with the 2008 crisis. This is where a financial institution took excessive risks to gain outsize returns, safe in the knowledge that the government would bail them out if things went wrong. The Dodd-Frank Act aims to end ‘too big to fail’ and eliminate ‘moral hazard’. SIFIs must limit both their risk-taking and their ability to threaten the stability of the financial system if they do suffer losses. They must prepare and provide a ‘living will’: a plan for an orderly bankruptcy.