Implementing Dodd–Frank: Orderly Resolution

Abstract

I would like to take the opportunity to discuss one of those challenging issues--the orderly resolution of systemically important financial institutions (SIFIs). The Dodd-Frank Wall Street Reform and Consumer Protection Act provided important new authority to the Federal Deposit Insurance Corporation (FDIC) to resolve SIFIs. Prior to the recent crisis, the FDIC's receivership authority was limited to federally insured banks and thrift institutions. There was no authority to place the holding company or affiliates of an insured institution or any other nonbank financial company into an FDIC receivership to avoid systemic consequences. The lack of this authority severely constrained the ability of the government to resolve a SIFI. This authority has now been provided to the FDIC under the Dodd-Frank Act. The question is whether the FDIC can develop the operational capability to utilize this authority effectively and a credible strategy under which an orderly resolution of a SIFI can be carried out without putting the financial system itself at risk. These key challenges have been the focus of the FDIC's efforts since the enactment of Dodd-Frank in July 2010. I would like to focus my comments on the prowess we have made in meeting these important challenges. Orderly liquidation authority, resolution planning, and the Office of Complex Financial Institutions The FDIC has taken a number of steps since Dodd-Frank was passed to carry out its new systemic resolution responsibilities. First, the FDIC established a new Office of Complex Financial Institutions to carry out three core functions: * Monitor risk within and across these large, complex financial firms from the standpoint of resolution; * Conduct resolution planning and develop strategies to respond to potential crisis situations; and * Coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution. For the past year, this office has been developing its own resolution plans in order to be ready to resolve a failing systemic financial company. These internal FDIC resolution plans, developed pursuant to the orderly liquidation authority provided under title II of Dodd-Frank, apply to a SIFI many of the same powers that the FDIC has long used to manage failed-bank receiverships. This internal resolution planning work is the foundation of the FDIC's implementation of its new responsibilities under Dodd--Frank. Second, the FDIC has largely completed the basic rulemaking necessary to carry out its responsibilities under Dodd--Frank. In July 2011, the FDIC Board approved a final rule implementing title II--orderly liquidation authority. This rule addressed, among other things, the priority of claims and the treatment of similarly situated creditors. Last September, the FDIC Board adopted two rules regarding resolution plans that systemically important financial institutions themselves will be required to prepare--the so-called living wills. The first resolution plan rule, jointly issued with the Federal Reserve, requires bank holding companies with total consolidated assets of $50 billion or more, and certain nonbank financial companies that the Financial Stability Oversight Council designates as systemic, to develop, maintain, and periodically submit resolution plans to regulators. Complementing this joint rulemaking, the FDIC issued another rule requiring any FDIC-insured depository institution with assets over $50 billion to develop, maintain, and periodically submit plans outlining how the FDIC would resolve it through the FDIC's traditional resolution powers under the Federal Deposit Insurance Act. These two resolution plan rules are designed to work in tandem and complement each other by covering the full range of business lines, legal entities, and capital-structure combinations within a large financial firm. …