The Federal Deposit Insurance
Corp. (FDIC) released a report detailing how the agency would manage the
orderly resolution of a large, complex financial company under Title II of the
Dodd-Frank Act.
While speaking at the Peterson
Institute in Washington, D.C., FDIC Chairman Martin Gruenberg touted the
report, Overview of Resolution Under Title II of the Dodd-Frank Act, as “the
most comprehensive explanation to date of how the FDIC expects to utilize those
authorities.”
“The ability of the FDIC and other
regulatory authorities to manage the orderly resolution of large, complex
financial institutions remains foundational to U.S. financial stability,”
Gruenberg said. “An orderly resolution is far preferable to the alternatives,
particularly resorting to taxpayer support to prop up a failed institution or
to bailing out investors and creditors. With this paper, we are reaffirming
that, should the need arise, the FDIC is prepared to apply the resolution
framework that the FDIC and many other regulatory authorities in the U.S. and
around the world have worked so hard to develop.”
In particular, the report spotlights
how the FDIC expects to resolve U.S.-headquartered Global Systemically
Important Banking Organizations (GSIBs). It also provides background on
resolution-related authorities contained in the Dodd-Frank Act; highlights key
measures designed to facilitate Title II preparation and implementation of
resolution; reviews strategic decision-making for the use of Title II
authority; and explains how the FDIC expects to carry out a Title II resolution
of a U.S. GSIB using a “Single Point of Entry” (SPOE) resolution strategy,
which the Fed announced in 2013.
Gruenberg described the SPOE strategy
as “a critical step forward in the FDIC’s thinking about how to address the
challenges of resolving large, complex financial institutions, and remains
foundational to our planning.”
“The ownership interests in the
underlying subsidiaries are transferred from the failed parent company to a new
Bridge Financial Company under the control of the FDIC,” Gruenberg
said. “Under the SPOE strategy, material subsidiaries remain open and operating
while we proceed through an orderly resolution. This protects depositors,
preserves value, and promotes financial stability. 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.”
The Federal Reserve and other
federal authorities finalized the following series of rules in 2017 designed to
help operationalize the SPOE strategy:
- The Federal Reserve’s rule on minimum Total Loss Absorbing
Capacity (TLAC) and long-term debt (LTD) was established to ensure sufficient
private sector capacity is available to absorb the losses and recapitalize the
institution during the resolution process.
- The “clean holding company rule” was created to limit GSIB holding
companies’ liabilities that are not long-term debt to help reduce complications
and competing claims levied by holding company creditors during the resolution
process.
- Requirements mandating that GSIBs provide for stays on
counterparty actions for Qualified Financial Contracts (QFCs), including
derivatives and repossessions, are intended to allow QFCs to be easily
transferred to a Bridge Financial Company or another new owner without disrupting
core financial markets.
Recognizing the global nature of GSIBS,
Gruenberg noted that the FDIC has invested significant effort in promoting international
cooperation with key counterpart jurisdictions, resulting in
mechanisms designed to:
- Pre-position resources to support the recapitalization of
subsidiaries in an SPOE resolution.
- Meet regularly with home and host authorities to discuss
firm-specific resolution plans in Crisis Management Groups.
- Continue to engage with cross-border counterparts at all levels to
test our operational preparedness. These engagements include biennial
principal-level resolution planning exercises with our UK and European Banking
Union counterparts.
Gruenberg also described the “three
keys process” for winding down GSIBs, as defined in Title II and elaborated on
in the new report.
“When a GSIB approaches failure, the
FDIC and other authorities would take up that specific case to decide, under
those circumstances, whether, when, and how the Title II framework would be
used,” he said. “The multi-agency process and statutory factors guiding this
decision are clearly laid out in Title II of the Dodd-Frank Act. This
process is often referred to as the ‘three keys process,’ because it requires
recommendations from two federal agencies – the Federal Reserve and the FDIC in
the case of most GSIBs – followed by a determination by the secretary of the
Treasury, in consultation with the president, to commence a Title II
receivership.”
The report and Gruenberg's complete remarks are available online here.