China, Switzerland, Germany and Japan are among nations close to reaching arrangements with U.S. regulators to ease the dismantling of failed banks, said Federal Deposit Insurance Corp. Chairman Martin J. Gruenberg.
U.S. regulators are working with German and Swiss counterparts on joint white papers similar to agreements already in place with the U.K. for how banks governed by multiple jurisdictions could be unwound by their host nations, Gruenberg said in remarks prepared for a speech yesterday in Washington. The FDIC will secure memorandums of understanding on bank resolutions with China and Japan soon, he said.
"It is critical that home and host jurisdictions understand well the approach to resolution of their counterpart and work together to develop a cooperative approach," he said.
The 2010 Dodd-Frank Act empowered the FDIC to seize a firm and dismantle it if regulators think a bankruptcy would pose a significant threat to the financial system. This resolution authority hasn't been tested, and Gruenberg said his agency will disclose a full description of its approach by year-end opening the idea to public comment.
Germany and Switzerland share the U.S. preference for a so- called single point of entry, in which the host nation takes over a failed bank's holding company, imposes losses on shareholders and lets healthy subsidiaries stay open. The approach depends on long-term debt held in the parent to absorb losses and capitalize a healthy bridge company, Gruenberg said. The agency is consulting with the Federal Reserve on a future rule to set a minimum.
U.S. regulators will run simulation exercises with U.K. counterparts this year and in 2014, Gruenberg said.
"Nearly 70 percent of the on- and off-balance sheet assets of our major institutions are held in the U.K," he said. "There is no close second."
Art Murton, the FDIC official in charge of planning for resolutions, and Bank of England Deputy Governor Paul Tucker said on Oct. 12 that the U.S. system is ready to handle a big- bank collapse.
"I think U.S. authorities could do it today and I mean today," said Tucker, who has worked with U.S. regulators on the cross-border hurdles to taking down an international firm. "A global financial system will not survive if we don't crack this problem."