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Gruenberg touts FDIC report on GSIB orderly resolution

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Banking, Financial Stability, Inside the Beltway
Tuesday, April 16, 2024

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.

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