"A real bank failure has yet to test the Dodd-Frank Act's resolution regime, but an industry group says its realistic mock-up shows the facility can prevent systemic fallout," writes American Banker's Joe Adler.

The Clearing House Association's simulated cleanup of a systemically important financial institution, also known as "SIFI A", proves it "can be a viable mechanism for resolution of a large, complex SIFI," under the Federal Deposit Insurance Corp.'s new "orderly liquidation authority."

The association's final report stated, "Although there were many issues to be resolved and difficult decisions to be made, as well as inevitable confusion and uncertainty that accompanies a crisis at a large financial institution, the first phase of the … resolution process for the failing SIFI A that began on a Friday evening was successfully completed by Sunday evening before the Asian markets reopened."

The Dodd-Frank Act established a process whereby the Treasury Department, bank regulators and the White House can opt for a special FDIC wind-down when the bankruptcy of a complex firm could threaten the market as a whole. Officials say that bankruptcy is still the preferred option, but the new facility would have prevented the panic that ensued from failures during the financial crisis. Dodd-Frank reform law also requires large firms to draft "living wills" to help regulators plan for resolutions.

For the full piece see "Clearing House Issues Final Report on Virtual Big-Bank Collapse" (may require subscription).