Speaking at the University of Pennsylvania’s Wharton School on Feb. 16, 2018, Federal Deposit Insurance Corporation Chairman Martin Gruenberg discussed the progress that has been made in planning for the resolution of systemically important financial institutions (SIFIs). Commenting that the progress “has been substantial and, I believe, not well appreciated,” the FDIC Chairman underscored not only that “the living wills process has proven enormously helpful to firms and regulators,” but also that “options and tools now exist that provide a path far better than existed in 2008 to help ensure that a systemic firm can fail, that shareholders, creditors, and management of the firm bear the consequences of their decisions, and that financial stability can be preserved during times of stress without taxpayer bailouts.”
In his prepared remarks, titled “Resolving a Systemically Important Financial Institution: A Progress Report,” Gruenberg observed that “orderly resolution of systemic firms had never been an explicit goal of financial regulation in the United States” prior to the 2008 financial crisis. “In fact, it was never really contemplated. The experience of the crisis and the enactment of Dodd-Frank changed that,” he noted.
Gruenberg said that developing the capability for the orderly failure of a SIFI, “without taxpayer support, and with accountability for the shareholders, creditors, and management of the failed firm” has been a top priority for the FDIC. After sketching the orderly liquidation authority under the Dodd-Frank Act, Gruenberg focused on the progress that has been made through “the living will resolution plan process in bringing about tangible changes to the structure and operations of the eight U.S. Global Systemically Important Banks (GSIBs) … to enhance the resolvability of these firms and avoid the bailouts of the last crisis.”
Highlights of progress made. After a series of resolution-plan filings by the U.S. GSIBs beginning in 2012, and joint guidance by the FDIC and the Federal Reserve Board beginning in 2013, the firms filed their most recent resolution plans in July 2017. Based on the FDIC’s and Fed’s joint feedback letters in December 2017 about those plans, Gruenberg asserted that although “there is still a great deal of work to do,” the U.S. GSIBs have made substantial progress—particularly by:
- establishing clean holding companies with pre-funded loss absorbing capacity;
- rationalizing their legal entity structures to align those structures and support their preferred resolution strategy;
- identifying and positioning capital and liquidity across material entities to support an orderly failure;
- implementing internal escalation triggers, playbooks, and other governance mechanisms to facilitate the timely execution of important recovery and resolution actions by the board of directors and senior management;
- adhering to the International Swaps and Derivatives Association’s “Universal Resolution Stay Protocol;”
- developing strategies and playbooks to maintain access to payment, clearing, and settlement services, including the description of operational and liquidity arrangements;
- taking steps to ensure that inter-company services shared by multiple affiliates will continue to be available in resolution to reduce the potential that the failure of one subsidiary within a firm will disrupt the operations of its affiliates and improve the firm’s ability to separate affiliates during resolution;
- modifying service contracts with key vendors to ensure the continuation of services as long as the firm continues to meet its obligations under the terms of the contract; and
- developing options for the sale of discrete businesses and assets under different market conditions to increase the flexibility of the firm's execution of its preferred resolution strategy, and taking steps to make those options actionable.
Concluding remarks. In his concluding remarks, Gruenberg emphasized that “the resolvability of firms will change as markets change and as firms’ activities, structures, and risk profiles change.” Accordingly, the FDIC and Fed expect the U.S. GSIBs to “remain vigilant in considering the resolution consequences of their management decisions.”
Indicating that there are inherent challenges and uncertainties associated with the resolution of a SIFI, Gruenberg pointed out that “we have not yet executed an orderly resolution of a financial institution of systemic consequence either under bankruptcy or the Orderly Liquidation Authority.” Despite the cautionary remark, the FDIC Chairman added, “But it is also true that we are in a different place today than we were in 2008.”
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