WASHINGTON — Federal Deposit Insurance Corp. officials fielded tough questions Thursday about how they have wielded the resolution planning powers given to them by the Dodd-Frank Act.
The grilling from the agency's advisory committee on systemic resolution came a day after regulators failed most of the largest U.S. banks on their living wills. But panel members questioned the value of the process, suggesting it was unrealistic.
"Has there ever been a self-funded bankruptcy restructuring by a large financial company in the history of the world?" asked Simon Johnson, a professor at the MIT Sloan School of Management and an outspoken critic of big banks.
Several experts argued that regulators had missed the forest for the trees in their determinations.
Armed with numbers, Richard Herring, a professor at the Wharton School of the University of Pennsylvania, questioned the depth of the plans submitted by the banks. JP Morgan, he said, had thousands of legal entities, but had only addressed about two dozen in its living will.
"This raises real questions about how well aligned their business structure is with their legal structure," he said. "We really are lacking some details that would enable us to see how particular institutions have progressed over time."
Peter Fisher, a former Treasury undersecretary for domestic finance in the George W. Bush administration, said that despite their high level of technical details, the determinations failed to address fundamental concerns.
"The staff are driven to the specificity," said Fisher, now a BlackRock executive. "It's very hard to see there's enough time set aside for a lot of the hard questions" such as "what could be done to simplify a big holding company."
The complexity of the plans could also have the effect of alienating board members and senior executives at the banks from the resolution planning process, he said.
"The question is, 'Should I go on a diet?' And knowing how much fat is in my pinkie and how much fat is in my baby toes doesn't really help,' " Fisher said.
Brent Hoyer, a deputy director of the FDIC's Office of Complex Financial Institutions, responded that the living wills, which ranged "anywhere from 1,000 pages to upwards of 100,000 pages," contained a lot of extraneous material. "The core crux of the strategy ... can really be condensed down to a much smaller group of pages," he said.
FDIC officials at the meeting described in detail what the determination process entailed — including horizontal teams focused on shared issues, such as liquidity or governance mechanisms; vertical teams that worked on individual firms across different issues, and an overarching framework that guided the whole process.
Throughout the process, the agency corresponded with the Federal Reserve Board — the other regulator charged with judging the plans — and with the firms themselves, repeatedly. One bank met with FDIC staff on 65 occasions during this latest round, said Hoyer.
"At each point in our process we're trying to make sure that there are two different sets of eyes," said Ricardo Delfin, also a deputy director of the FDIC's OCFI. "Each point in the process is a check, a recheck, a distillation that ultimately goes to the letters that were just released."
The regulators worked hard to produce tailored responses to the banks' bankruptcy plans, officials said.
"People think, 'Oh, it's a checklist.' It's absolutely not," Hoyer said. "We are absolutely, by no means, looking to make everybody the same because they fundamentally operate differently."
But several advisory committee members questioned whether the process was going anywhere if, six years after the Dodd-Frank Act that put it in motion, a majority of the large, complex U.S. firms were failing.
"Is this a reflection on the willingness of the banks to participate, or on their gaming the system?" asked Michael Bradfield, a former general counsel of the Fed. "Is it a reflection on the real possibility of developing living wills?"
Anat Admati, a Stanford University professor who is a frequent proponent of dismantling big banks, also questioned whether banks could really be expected to fully understand their own structure.
"Do they know enough about their counterparties and their counterparties' counterparties?" she said. "Is it fundamentally too difficult because of interconnectedness?"
Hoyer replied that the firms had been instructed to consider a "range of possible failure scenarios and a range of market conditions," and that regulators had separately pushed them to improve their information system capabilities.
Another concern raised by H. Rodgin Cohen, a principal at Sullivan & Cromwell, was the limits of the bankruptcy process — "a form in its present inclination ill-suited" for facilitating the resolution of a megabank, he said.
"I don't think we want to lead to a single bankruptcy judge somewhere to unwind one of these," he said, suggesting that the Dodd-Frank law be amended to be strengthened with preemptive language to overrule state laws.
The question of liquidity — whether banks can be realistically expected to keep enough cash reserves to stay afloat during the process of an orderly resolution — was also raised repeatedly.
"I think you're trying to change the laws of physics here," Johnson said. "Firms always fail when they run out of liquidity."
But Hoyer said "there will always be some level of probability" calculations in reducing systemic risk.
"If an asteroid hit the earth," Johnson responded, "would that work?"