-
Companies that submitted initial resolution plans last year to the Fed and FDIC under Dodd-Frank must detail in their second drafts how they would address impediments to a wind-down and follow the series of steps required for bankruptcy.
April 15 -
The Federal Reserve Board on Monday issued a proposal that would impose a fee on the biggest bank holding companies to cover expenses related to its supervisory duties.
April 15
WASHINGTON — The Federal Reserve Board is unlikely to issue clear standards on when it would tap powers under the Dodd-Frank Act to dismantle a big bank posing a "grave threat" to the economy, a top official said Tuesday.
Scott Alvarez, the Fed's general counsel, told lawmakers the determination about whether to use the special authority would more likely depend on a "variety of circumstances" unique to individual institutions, thereby complicating efforts to define "grave threat" beforehand.
"It's very difficult to have a uniform rule," Alvarez told the House Financial Services oversight subcommittee.
As debate in Congress and elsewhere grows about whether stronger methods are needed to limit systemic risks from financial giants, the "grave threat" authority is a less-discussed element of Dodd-Frank compared with other measures in the law, such as a new Federal Deposit Insurance Corp. mechanism for unwinding failing giants and procedures for large firms to plot their own wind-down through so-called "living wills."
Under Section 121 of the law, the provision — championed by former Rep. Paul Kanjorski, D-Pa. — authorizes the Fed to take certain actions against a large institution if the regulator considers it to be a "grave threat." Those actions — which require two-thirds consent from members of the Financial Stability Oversight Council — could include limits on a firm's ability to grow through mergers, and the termination of certain activities or restricting how a company conducts activities. In extreme cases where those actions are not sufficient, the Fed could require asset divestitures.
The powers to some extent have parallels with other areas of the law. For example, the living wills authority granted to the Fed and the Federal Deposit Insurance Corp. under Section 165 allows the two agencies to force structural changes at firms that fail to develop adequate resolution plans.
Alvarez said the "grave threat" authority is meant to be used in very rare cases.
"We're allowed to take action under other provisions" in Dodd-Frank "if there is a 'risk' to financial stability. 121 says, 'Not a risk to financial stability, [but] a threat to financial stability.' And not any threat, but a grave threat to financial stability," he said. "So, it's a very high standard in comparison" to other provisions.
He added that the regulator must first carry out a list of preliminary actions before dismantling an institution is discussed.
"A condition of 121 is that we take a variety of steps short of requiring breakup before we're allowed to even consider breaking up the firm," he said.
But as demonstrated by Tuesday's hearing, which looked at a multitude of methods under the 2010 reform law for dealing with institutions deemed too big to fail, the "grave threat" provision has elicited some alarms among Republicans over how broadly the Fed could use it.
"It's really the standard that, 'I'll know it when I see it.' … Isn't that what the standard is?" said Rep. Sean Duffy, R-Wis., in a series of tough questions for Alvarez pressing the official on why the central bank cannot signal parameters of the authority.
Alvarez suggested that developing a uniform standard could undercut the central bank's ability to exercise the authority as necessary in a situation that is inconsistent with any prior definition for grave threat.
The "decision depends very much on the facts and circumstances, and so it is very hard in this area to set a uniform rule," he said. "I don't know whether the board will at some point do that. My immediate expectation is that we would not."
Alvarez, who was joined at the hearing by two senior FDIC officials, was also asked whether he thought stronger legislative measures were needed to break up the biggest financial institutions.
He said Dodd-Frank already gives regulators an array of tools they did not have at their disposal during the financial crisis.
"We can make a lot of progress in addressing too big to fail if we implement the program that is in Dodd-Frank," Alvarez said.
James Wigand, the director of the FDIC's office of complex financial institutions, said it is "an open question" whether more statutory solutions are needed for eliminating too big to fail.
"It's a very important question. I think it's certainly beyond my pay grade," Wigand said. "Perhaps the Congress is the appropriate place given the importance of that question for that type of debate."
