WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg on Wednesday outlined how the agency would resolve a "too big to fail" bank if one of them were to collapse.
The topic has taken on new importance after the falls last year of
The Dodd-Frank Act, created in response to the 2008 financial crisis, granted the FDIC "dramatically expanded authorities" to resolve one of the United States' largest banks, otherwise known as a global systemically important bank, or GSIB.
"A U.S. GSIB failure will be extraordinarily challenging under any circumstances," Gruenberg said. "Needless to say, we have yet to execute an orderly resolution of a U.S. GSIB. And look, until we do so successfully, there will be questions as to whether it can be done."
The FDIC, alongside Gruenberg's speech, released a 50-page overview of its planned response to the failure of one of these "too big to fail" institutions. Gruenberg said that the approach in the paper is far more preferable to the alternatives such as "resorting to taxpayer support to prop up a failed institution or to bail out investors or creditors."
"With this paper the FDIC is reaffirming that, should the need arise, we are prepared to apply the resolution framework that the FDIC and many other regulatory authorities in the U.S. and globally have worked so hard to develop," he said.
Gruenberg said that his agency's outline is "particularly timely" in light of Swiss authorities' decision last year to not place Credit Suisse in a resolution process that they had developed post 2008.
"This was done despite the view, as detailed in [a Financial Stability Board] report released last year, that the cross-border resolution framework was sound and that a resolution was ready to be implemented by the Swiss authorities," he said.
The FDIC favors what's called a "single point of entry," or SPOE, resolution strategy, Gruenberg said. In an SPOE resolution, the FDIC places just one legal entity, the parent holding company, into resolution. The ownership interests in the underlying subsidiaries would be transferred from the failed parent company to a new bridge company, which is under the control of the agency.
Federal Deposit Insurance Corp. Chair Martin Gruenberg said the agency would prioritize urging banks to invest in underserved communities as part of a revised economic inclusion plan unveiled Thursday.
This strategy, Gruenberg said, would allow those subsidiaries to remain open, limiting cascading damage to the financial system.
"This protects depositors, preserves value, and promotes financial stability," he said. "In an SPOE resolution, the failed holding company's shareholders and unsecured creditors are not transferred to the bridge financial company, become claimants against the receivership, and will ultimately absorb the losses of the firm. There would be no taxpayer support, and the board and senior executives of the failed firm would be removed."
In order to resolve a GSIB, the FDIC would need the buy-in of other regulators, typically the Federal Reserve in the case of one of the largest banks. The FDIC would also need the Treasury secretary to agree on an orderly liquidation plan for the agency to access the Orderly Liquidation Fund, or OLF, giving the FDIC a temporary backstop source of liquidity.
"Any utilization of the OLF will be repaid with the assets of the failed firm with no taxpayer exposure," Gruenberg said.
The agency expects that the orderly liquidation plan would be an SPOE resolution strategy.
At this point, as the FDIC moves to resolve a GSIB, the board of directors of the failed bank and senior executives who were responsible for the failure would not be retained by the bridge company. Dodd-Frank also provides authority for the FDIC to claw back compensation from senior executives "who are considered to be substantially responsible for the company's failure."
Once the bridge company is stabilized, Gruenberg said, the FDIC would plan an exit resolution by using a so-called "securities-for-claims exchange."
"In this approach, new debt and equity securities in the successor company (or companies) are distributed to satisfy the claims against the receivership," he said. "Once the securities are distributed, the bridge financial company is terminated and the successor company or companies will be owned by the former claimants."
While the timeline would likely vary depending on the scenario, the agency expects the process to take at least nine months, Gruenberg said.
