WASHINGTON — Under legislation the Treasury Department sent to Capitol Hill late Wednesday, the Federal Reserve Board would take the lead role in determining which institutions pose a systemic risk while the Federal Deposit Insurance Corp. would handle resolution duties.

But before the Fed could recommend the FDIC shut down a firm it would need the backing of an “appropriate” federal regulator, which the Treasury defined as the FDIC, the Securities and Exchange Commission or the Commodity Futures Trading Commission, according to a copy of Treasury’s bill obtained by American Banker.

The resolution powers would cover the holding companies and subsidiaries of banks, thrifts, insurers, any broker dealer registered with the SEC and any future commission merchant or commodity pool operator.

For the Fed to determine a company poses a risk to the financial system it would need a vote of two-thirds of its own board as well as the board of the company’s federal regulator.

The Fed, along with Treasury and the institution’s federal regulator, would determine if the financial institution is in default or danger of default, whether the failure of the company would have serious adverse effects on the economy and whether government assistance would avoid such adverse effects.

Companies defined as in default or in danger of default include ones critically undercapitalized, likely to incur losses that would deplete capital, or unable to pay obligations in the normal course of business.

The Treasury secretary in consultation with the President would have to approve a written recommendation to resolve a firm suggested by the Fed and the other agency.

The Treasury would grant the FDIC the power to carry out the resolution, building on the agency’s experience with resolving banks and thrifts.

The legislation would allow the FDIC to provide financial assistance or place a company into conservatorship or receivership. Specifically, the FDIC could make loans to the institution, purchase assets of the company or any subsidiary, assume or guarantee the obligations of the company, acquire any equity interest in the company, take a lien on any assets of the company or its subsidiary, sell or transfer all or part of the assets, and appoint itself conservator or receiver of the company.

The Treasury and FDIC would be required to write rules to implement these resolution powers.

The measure also would give the FDIC the authority to create a bridge financial company to assume a company’s liabilities, purchase its assets and perform temporary functions. The bridge company would operate for two years but the FDIC would have the authority to extend it for three additional years.

The FDIC would primarily fund the costs through recoveries on asset sales and special assessments on financial companies. Congress could also appropriate additional funds to the FDIC.

The 61-page legislative proposal follows a short summary of Treasury’s resolution plans released early Wednesday. It is part of the agency’s broader regulatory restructuring proposal, on which Treasury Secretary Timothy Geithner is scheduled to testify before the House Financial Services Committee on Thursday.

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