WASHINGTON — Policymakers agree the federal government must be able to unwind giant nonbanks that get into trouble, but one issue far from settled is how to pay for those resolutions.
Some policymakers envision a system similar to deposit insurance, in which banks and thrifts pay fees to cover future losses. But there are several obstacles, including the fact that many institutions considered systemically important do not have an easily discernible assessment base, like the domestic deposits used to calculate bank premiums.
"Deposits are largely a retail item, so, looking at other companies such as insurers or securities firms, you might want to look at their exposures to retail customers, whether that's an insurance policy or different kinds of retail securities," said Dwight C. Smith 3rd, a partner with the Washington office of Alston & Bird LLP. "That would be hugely complicated to do."
Creating a risk-based fee system also would be tough, considering these firms have vastly different risk profiles. Also, even though the Federal Deposit Insurance Corp. has the power to deny insurance to banks, it would be unlikely to get sole power to determine which firms are deemed systemic.
"The FDIC picks who can join" the Deposit Insurance Fund "now, but whoever is the systemic resolution agency is not going to decide who is systemically important," said Douglas Landy, a partner at Allen & Overy LLP.
"Presumably it would be the Fed." The FDIC would "just be asked to resolve the entity," he said. "How that's going to work remains a significant issue."
The Treasury Department is expected to tackle this issue Wednesday in its plan to reform regulatory oversight. In March, it proposed giving the FDIC the power to unwind systemically important companies that got into trouble and suggested that the agency come up with a way to impose special assessments on them after a resolution.
The FDIC itself has backed a prefunded, industry-supported system — building reserves before a large firm fails — over any taxpayer support.
"Such a fund reduces taxpayer exposure for the failure of systemically important institutions," FDIC Chairman Sheila Bair said in congressional testimony last month.
The FDIC envisions a Financial Companies Resolution Fund to finance what officials say would be a separately named arm to run the new operation. The agency has said keeping it separate would protect the brand and the funding cost for the agency's traditional deposit insurance guarantee.
"It's easy to say, 'We're going to start this new entity,' but how is it going to be funded?" asked Ron Glancz, a partner at Venable LLP. "I'm not sure these issues have been fleshed out yet."
Defining when a firm would be deemed "systemic" and when it would have to start paying into this fund would be tricky.
"An institution might be small now. But in two years it could grow and become a systemic risk," Glancz said. "When do you actually assess them for the risk?"
The FDIC would likely oversee the rate-setting, but it would have to collaborate with a systemic risk regulator — likely to be the Federal Reserve Board, a council of regulators or a combination of the two.
For example, the FDIC could establish risk criteria, such as capital levels, that would determine what an institution pays. But setting strict minimum capital requirements would likely fall to the systemic risk regulator.
"I'm not sure what authority the systemic resolution agency will have" to set those levels, Landy said.
"There has to be some connection between what the … systemic regulator will do and what the FDIC or whoever will do as the resolution agency."
