FDIC plans relief for bank subsidiaries required to map out failure

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WASHINGTON — Federal Deposit Insurance Corp. Chairman Jelena McWilliams said her agency will soon propose “significant changes” to rules requiring large FDIC-insured banks to plot out how they would be unwound in a failure.

Separate from Dodd-Frank Act rules — implemented jointly by the FDIC and Federal Reserve — for giant bank parents to submit their own resolution plans, the FDIC also requires those firms to draft such plans for their "insured depository institutions" with over $50 billion in assets.

Specifically, McWilliams said the IDI rule can be amended to run more efficiently and effectively alongside the Dodd-Frank resolution requirements for global financial firms. The FDIC plans to issue an advance notice of proposed rulemaking “in the coming months” on changes to the IDI requirements, McWilliams said.

“While we need to do advanced planning, after several years of renewing these comprehensive plans, we recognize that we can do so in a more targeted and efficient manner,” she said Wednesday at a conference in New York hosted by The Clearing House and the Bank Policy Institute. “As a result, the FDIC is planning to propose significant changes to its IDI rule.”

The FDIC is also working in concert with the Fed on changes to the Dodd-Frank rules governing resolution plans, also known as "living wills." Yet McWilliams said resolution planning requirements should recognize that any firm could conceivably fail.

“The FDIC under my leadership will continue to prioritize working to ensure the success and stability of our nation's banks and financial system. But there is no success without the real threat of failure. It must be okay for any bank to fail,” she said. “Resolution planning is not rooting for resolution; it is building a process to ensure that failure is possible so that market discipline exists, taxpayers are protected, and insured depositors have confidence they will receive their cash quickly and orderly under any circumstances.”

Changes to the IDI rule could include determining which institutions should be subject by tailoring it to the size, complexity and risk of the bank, McWilliams said.

The FDIC is also considering whether to raise the $50 billion asset threshold in the IDI rule now that Congress in May raised the threshold for bank holding companies subject to resolution planning under Dodd-Frank. The threshold originally in the IDI rule was meant to sync with Dodd-Frank, McWilliams noted.

“As a result, we will be soliciting comment on which institutions should be subject to the revised rule,” McWilliams said.

In addition to living will requirements, Dodd-Frank also gave the FDIC new powers to be able to resolve failing behemoths in a manner aimed at avoiding systemic shock waves.

McWilliams said the agency is "considering whether refinements could be made to improve" how the FDIC implements those powers, known as the Orderly Liquidation Authority. Such changes could include "ways to bring more certainty and more transparency to the process," she said.

In February, the Treasury Department released a report endorsing the OLA powers but said the FDIC's authority could still be restricted. The report also proposed a new bankruptcy code chapter — Chapter 14 — just for financial firms, to make OLA less necessary.

"The Treasury Department has offered several good suggestions regarding OLA that we are looking at closely," McWilliams said in her speech.

Interestingly, McWilliams said the IDI rule on resolution plans should remain in place despite adoption by several larger global parent companies for a resolution strategy known as "single point of entry," or SPOE. Under that strategy, the holding company is closed but the subsidiaries continue to operate.

“I recognize that some have argued that an IDI plan is unnecessary for firms that have adopted an SPOE strategy, because there should not be a resolution of the IDI under such circumstances,” McWilliams said. “Though I am sympathetic to the argument ... SPOE is untested, and the challenges to successful execution of an SPOE strategy are notable. Still, we will carefully consider all comments as we work on revising the rule.”

To offer some relief during the rulemaking process, McWilliams said the FDIC will not require the next round of resolution plan submissions under the IDI rule for now.

“In other words, no institution will need to file an IDI plan until we have finalized the revised requirements,” she said.

Separately, the FDIC is also working with the Fed to better distinguish resolution planning requirements for global systemically important banking organizations, or GSIBs, from less systemically risky regional banks.

“For the GSIBs, we recognize the progress that has been made, and we are exploring how to make these plans more targeted,” McWilliams said. “For regional banks, we recognize the considerably lesser threat posed to U.S. financial stability.”

McWilliams repeatedly said she favors allowing the largest financial firms to fail through bankruptcy rather than bail them out. However, she also encouraged lawmakers to tailor a bankruptcy code for large financial firms. Several bills have been introduced to Congress in recent years to establish such bankruptcy changes but were never enacted.

“I strongly support such efforts,” McWilliams said. “The FDIC stands ready to work with Congress and hopes to see such a measure signed into law.”

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