AFR on Can Regulators End Too -Big-to-Fail?
Americans
for Financial Reform
Can
Regulators End Too Big to Fail?
Wednesday,
November 4, 2015
Key
Topics & Takeaways
- Resolving
Firms Under Bankruptcy Code: Sen. Brown (D-Ohio) claimed that the goal of
Wall Street reform is to rationalize and simplify the structure of the
largest banks, and argued that, if the Bankruptcy Code “is not up to the
task,” then Congress should consider changes to avoid the case whereby the
largest banking institutions remain “too complex to manage” and “too
opaque to regulate.”
- Too Big
to Fail (TBTF) Persists:
Simon Johnson argued that policymakers “are a very long way from solving
[the TBTF] problem” because: 1) the living wills filed by large bank
holding companies are “completely non-credible;” 2) cross-border
cooperation in the next crisis will be an “absolute disaster;” and 3) the
prudential measures which aim to reduce the likelihood of failed financial
institutions have not really resulted in “dramatic” increases in capital
as some allege.
- Remaining
Obstacles to Resolution: The FDIC’s Arthur Murton explained
that there are five main obstacles to resolution under the bankruptcy
regime: 1) multiple competing insolvency regimes; 2) lack of global
cooperation; 3) capital and liquidity; 4) counterparty actions; and 5)
preserving continuity of critical services. He reiterated that the FDIC
has called for financial institutions to address these shortcomings.
Speakers
- Senator Sherrod Brown (D-Ohio)
- Lisa Donner, Executive Director, Americans for
Financial Reform
- Marcus Stanley, Policy Director, Americans for
Financial Reform
- Bruce Grohsgahl, Helen Balick Visiting Professor in
Bankruptcy Law, Delaware Law School, and former Visiting Scholar at
Americans for Financial Reform
- Simon Johnson, Ronald Kurtz Professor of
Entrepreneurship, MIT Sloan School of Management
- Stephen Lubben, Harvey Washington Wiley Chair in
Corporate Governance, Seton Hall Law
- Timothy P. Clark, Senior Associate Director, Banking
Supervision and Regulation, Federal Reserve Board
- Arthur Murton, Director, Office of Complex Financial
Institutions, Federal Deposit Insurance Corporation
Introduction
Lisa Donner, Executive Director, Americans
for Financial Reform
Donner
explained that Section 165 of the Dodd-Frank Act directs regulators to take on
‘too big to fail’ (TBTF) by requiring banks to create credible plans for their
orderly resolution. Donner explained that the event would focus on whether it
is actually possible to do so and what, if any, changes to banking
organizations are necessary to facilitate orderly resolution of failed
financial institutions.
Senator Sherrod Brown (D-Ohio)
Brown
recalled his role on the Senate Banking Committee in 2007 and the events that
led to the Troubled Assets Relief Package (TARP) being passed by Congress. On
the TARP rescue package, he said he “did not see any choice but to vote
yes” despite the fact that it would be one of the “worst
political” votes of his career. With regard to the financial reforms
implemented since the financial crisis, Brown noted that the living will
process is the main tool used for resolution planning, to plan for the failure
of one of the large, complex “megabanks” without resorting to taxpayer
dollars.
Brown
claimed that the “eleventh hour mergers” in the midst of the financial crisis
concentrated the financial sector into the six largest banks, which he said
grew by hundreds of billions of dollars as a result of their consolidation. He
asserted that, fifteen years ago, the combined assets of the six largest banks
combined assets constituted approximately 16-18 percent of GDP, however now he
claimed that figure has grown to approximately 63-65% of GDP. He also stated
that the largest banks have roughly 13,000 legal entities, which he argued
demonstrates the complexity of the largest financial institutions.
Brown
claimed that the goal of Wall Street reform is to rationalize and simplify the
structure of the largest banks, and that Title 2 of the Dodd-Frank Act created
an orderly resolution authority that would not expose taxpayers to future bank
bailouts. He argued that, if the bankruptcy code “is not up to the task,” then
Congress should consider changes. He also referenced former Federal Reserve Chair
Ben Bernanke’s opposition to the idea of using the Bankruptcy Code to resolve
financial institutions, since it was too slow and complex to put Lehman
Brothers through the bankruptcy process. Brown asserted that this demonstrates
that the largest banking institutions are often “too complex to manage” and
“too opaque to regulate.”
Brown
explained that living wills require Wall Street banks to put together a
credible resolution plan. If not, he suggested that the regulators can assess
charges on individual firms, and he referenced the Brown-Vitter
bill introduced in the 113th Congress, which would increase
capital requirements for larger, more complex banking institutions. Brown also
noted that, when higher capital standards were introduced in 2013 by Federal
financial regulators, it “made the financial system more stable.” He also
claimed that regulators “made the move on their own” because there was a lot of
“public pressure” for them to do so.
Regarding
the Fed’s living will exercise, Brown stated that Chair Janet Yellen is serious
about implementing living wills, which he argued are an important element of
the Dodd-Frank Act and are important to preserve the stability of the financial
system. Still, he maintained that if regulators are “unwilling” to employ
living wills in a meaningful way, Congress should intervene.
Brown
closed by saying the goal is to have simpler financial institutions that can
fail without bringing down the economy with them. He also stated that he
believes “banking should be boring.”
Panel with Bankruptcy Experts
Marcus Stanley, Policy Director, Americans for Financial
Reform provided a background of the differences between Titles I and II of the
Dodd-Frank Act, and argued that people “intentionally conflate” these two
titles despite their differences. He also explained the differences between the
single point-of-entry and multiple-point-of-entry resolution strategies.
Stephen Lubben, Chair in Corporate
Governance, Seton Hall Law
Lubben
explained that the conventional bankruptcy regime provides that an insolvent
company cannot give away or sell its assets for less than fair value. However,
he asserted that some financial institutions’ public resolution plans appear to
allow such “fraudulent transactions,” which he suggested could result in
lawsuits brought against the subsidiaries that receive such funding transfers
during a crisis. Lubben argued that this observation highlights that the
publicly available resolution plans for financial institutions contain a
“violation of […] bankruptcy 101.”
Bruce Grohsgahl, Professor in Bankruptcy Law, Delaware
Law School
Grohsgahl
explained that most companies that file for conventional bankruptcy protection
must continue to borrow enough money to fund restructuring and operations,
which he claimed is a “daunting task.” Grohsgahl suggested that this issue
remains unresolved for financial institutions entering into bankruptcy, as he
explained that the banks’ public resolution plans contain “dubious” assumptions
about resolution funding sources, including intercompany payables which he
argued would take years to legally “sort out” and asset sales that take time to
apply. As a result, he suggested that there be limits on
cross-collateralization and cross defaults, as well as more extensive stay
protection.
Simon Johnson, Professor of Entrepreneurship,
MIT Sloan School of Management
Johnson
argued that the industry has made progress with regard to Titles I and II.
However, Johnson argued that policymakers “are a very long way from solving
[the TBTF] problem” because: 1) the living wills filed by large bank holding companies
are “completely non-credible;” 2) cross-border cooperation in the next crisis
will be an “absolute disaster;” and 3) the prudential measures which aim to
reduce the likelihood of failed financial institutions have not really resulted
in “dramatic” increases in capital as some allege. Rather, he asserted that
capital levels of large banking institutions in the U.S. only grew from 4% of
equity relative to tangible assets during the crisis to 5% today.
Johnson
asserted that the Brown-Vitter bill was a “great idea” but is not being
implemented, and he suggested that policymakers consider ways to “make banking
boring,” such as by adopting a modern version of Glass-Steagall, which he
claimed has bipartisan support. Johnson closed by stating that the industry has
“not made enough progress” towards addressing TBTF in any “meaningful
sense.”
Question
and Answer
In
response to a question regarding a bill in the House which would introduce a
new version of Chapter 14 of the Bankruptcy Code, Lubben noted that he testified
in support of the bill in front of the House Judiciary Committee last year. He
stated that the House version of the bill did not repeal Title II, and that
there was no funding mechanism for firms in resolution, so he argued that some
concerns would still be relevant if the Chapter 14 were adopted.
In
response to a question about the barriers to effective cross-border resolution,
Johnson explained that corporate structures vary widely across borders, and
that policymakers would need a treaty with each jurisdiction in order for
bankruptcy to work across borders.
In
response to an audience participant’s question about potential risks in the
credit markets, Johnson suggested that there is no way to know what lies ahead
and, as such, regulators should rely on higher capital standards for banks.
On
the biggest barriers that preclude cooperation between international
regulators, Johnson explained that relying on cooperation between bankruptcy
courts in other jurisdictions under Title I is “completely unachievable;” but
suggested that cooperation between regulatory authorities across borders could
be facilitated through a memorandum of understanding (MOU) rather than a
treaty, however he really thinks that due to local political pressures in a
crisis, this option would be “not attainable.”
In
response to a question regarding how the European Union is addressing these
issues through the Bank Recovery and Resolution Directive (BRRD), Johnson
explained that there are inconsistent national implementation efforts across EU
member states, which make it difficult to discern whether there are policy
responses that will be applied consistently in a crisis.
Panel with Regulators
Stanley
asked the panelists to reflect on Chair Gruenberg’s speech from
May 2015 on the resolution process and goals. Timothy P. Clark,
Senior Associate Director, Banking Supervision and Regulation, Federal Reserve
Board, reminded the audience that the recovery and resolution process is what
comes “after a variety of other things have failed.” Clark noted that there is
“a lot more resiliency in the banking system” due to regulatory efforts to
improve prudential standards, as well as strengthening recovery and resolution preparedness. Clark
recalled that the Fed issued guidance (14-8)
which conveys the Fed’s expectations of how firms should remove impediments to
resolvability, including by de-risking, de-leveraging, and selling assets,
among other themes. In addition, Clark noted that the Fed and FDIC jointly
issued a statement
that identified the shortcomings of the second round of resolution plans
submitted in 2013. He said firms need to understand vulnerabilities in their
corporate structure, such as legal entities that may pose
vulnerabilities. He also pointed to SR letter (14-1)
which in 2014 laid out specific capabilities that the Fed expects firms to have
for resolution and recovery. As part of that, Clark said the Fed expects firms
to understand where vulnerabilities and connections are within and between
legal entities (through use of a management information system).
Supervisory
Examination
Clark
also noted that he runs the Comprehensive Capital Analysis and Review (CCAR)
process at the Fed, which it has mandated for five years to ensure that firms
and their supervisor understand vulnerabilities across an organization.
International
Coordination
Arthur
Murton, Director, Office of Complex Financial Institutions,
Federal Deposit Insurance Corporation, noted that there has been “a lot of
progress made” on the international coordination front since 2008. He explained
that the FDIC resolution team now has relationships with its counterparts at
the resolution authorities in other jurisdictions, and that it hosts a joint
exercise with the UK resolution authorities to simulate how to deal with the
operational complexities of cross-border resolution in the next crisis.
Single
vs. Multiple Point-of-Entry
On
single vs. multiple-points-of-entry strategies, Murton cautioned that people should
expect a firm that goes into resolution to come out “significantly
different” than when it entered.
Stay
Protocol
Murton
also explained that the industry has worked with regulators, including the
FDIC, to introduce early termination rights for derivatives contracts to allow
regulators more time to deal with a crisis. He noted that the International
Swaps and Derivatives Association (ISDA) revised its standard protocol to
impose a temporary stay on early termination rights for derivatives contracts, which
will help ensure that contracts governed by non-U.S. law will be subject to
this treatment. Murton noted that 18 of the largest global financial
institutions have voluntarily adhered to this protocol, and that he expects
regulators to put in place statutory requirements to solidify this
treatment.
Remaining Obstacles to Resolution
Murton
explained that there are five main obstacles to resolution under the bankruptcy
regime: 1) multiple competing insolvency regimes; 2) lack of global
cooperation; 3) capital and liquidity; 4) counterparty actions; and 5)
preserving continuity of critical services. He reiterated that the FDIC has
called for financial institutions to address those shortcomings.
For
more information on this event, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Capital/Resolution Authority/SIFIs,Hearing Summaries Agency:Special Event,Publish Year:2015
Americans
for Financial Reform
Can
Regulators End Too Big to Fail?
Wednesday,
November 4, 2015
Key
Topics & Takeaways
- Resolving
Firms Under Bankruptcy Code: Sen. Brown (D-Ohio) claimed that the goal of
Wall Street reform is to rationalize and simplify the structure of the
largest banks, and argued that, if the Bankruptcy Code “is not up to the
task,” then Congress should consider changes to avoid the case whereby the
largest banking institutions remain “too complex to manage” and “too
opaque to regulate.”
- Too Big
to Fail (TBTF) Persists:
Simon Johnson argued that policymakers “are a very long way from solving
[the TBTF] problem” because: 1) the living wills filed by large bank
holding companies are “completely non-credible;” 2) cross-border
cooperation in the next crisis will be an “absolute disaster;” and 3) the
prudential measures which aim to reduce the likelihood of failed financial
institutions have not really resulted in “dramatic” increases in capital
as some allege.
- Remaining
Obstacles to Resolution: The FDIC’s Arthur Murton explained
that there are five main obstacles to resolution under the bankruptcy
regime: 1) multiple competing insolvency regimes; 2) lack of global
cooperation; 3) capital and liquidity; 4) counterparty actions; and 5)
preserving continuity of critical services. He reiterated that the FDIC
has called for financial institutions to address these shortcomings.
Speakers
- Senator Sherrod Brown (D-Ohio)
- Lisa Donner, Executive Director, Americans for
Financial Reform - Marcus Stanley, Policy Director, Americans for
Financial Reform - Bruce Grohsgahl, Helen Balick Visiting Professor in
Bankruptcy Law, Delaware Law School, and former Visiting Scholar at
Americans for Financial Reform - Simon Johnson, Ronald Kurtz Professor of
Entrepreneurship, MIT Sloan School of Management - Stephen Lubben, Harvey Washington Wiley Chair in
Corporate Governance, Seton Hall Law - Timothy P. Clark, Senior Associate Director, Banking
Supervision and Regulation, Federal Reserve Board - Arthur Murton, Director, Office of Complex Financial
Institutions, Federal Deposit Insurance Corporation
Introduction
Lisa Donner, Executive Director, Americans
for Financial Reform
Donner
explained that Section 165 of the Dodd-Frank Act directs regulators to take on
‘too big to fail’ (TBTF) by requiring banks to create credible plans for their
orderly resolution. Donner explained that the event would focus on whether it
is actually possible to do so and what, if any, changes to banking
organizations are necessary to facilitate orderly resolution of failed
financial institutions.
Senator Sherrod Brown (D-Ohio)
Brown
recalled his role on the Senate Banking Committee in 2007 and the events that
led to the Troubled Assets Relief Package (TARP) being passed by Congress. On
the TARP rescue package, he said he “did not see any choice but to vote
yes” despite the fact that it would be one of the “worst
political” votes of his career. With regard to the financial reforms
implemented since the financial crisis, Brown noted that the living will
process is the main tool used for resolution planning, to plan for the failure
of one of the large, complex “megabanks” without resorting to taxpayer
dollars.
Brown
claimed that the “eleventh hour mergers” in the midst of the financial crisis
concentrated the financial sector into the six largest banks, which he said
grew by hundreds of billions of dollars as a result of their consolidation. He
asserted that, fifteen years ago, the combined assets of the six largest banks
combined assets constituted approximately 16-18 percent of GDP, however now he
claimed that figure has grown to approximately 63-65% of GDP. He also stated
that the largest banks have roughly 13,000 legal entities, which he argued
demonstrates the complexity of the largest financial institutions.
Brown
claimed that the goal of Wall Street reform is to rationalize and simplify the
structure of the largest banks, and that Title 2 of the Dodd-Frank Act created
an orderly resolution authority that would not expose taxpayers to future bank
bailouts. He argued that, if the bankruptcy code “is not up to the task,” then
Congress should consider changes. He also referenced former Federal Reserve Chair
Ben Bernanke’s opposition to the idea of using the Bankruptcy Code to resolve
financial institutions, since it was too slow and complex to put Lehman
Brothers through the bankruptcy process. Brown asserted that this demonstrates
that the largest banking institutions are often “too complex to manage” and
“too opaque to regulate.”
Brown
explained that living wills require Wall Street banks to put together a
credible resolution plan. If not, he suggested that the regulators can assess
charges on individual firms, and he referenced the Brown-Vitter
bill introduced in the 113th Congress, which would increase
capital requirements for larger, more complex banking institutions. Brown also
noted that, when higher capital standards were introduced in 2013 by Federal
financial regulators, it “made the financial system more stable.” He also
claimed that regulators “made the move on their own” because there was a lot of
“public pressure” for them to do so.
Regarding
the Fed’s living will exercise, Brown stated that Chair Janet Yellen is serious
about implementing living wills, which he argued are an important element of
the Dodd-Frank Act and are important to preserve the stability of the financial
system. Still, he maintained that if regulators are “unwilling” to employ
living wills in a meaningful way, Congress should intervene.
Brown
closed by saying the goal is to have simpler financial institutions that can
fail without bringing down the economy with them. He also stated that he
believes “banking should be boring.”
Panel with Bankruptcy Experts
Marcus Stanley, Policy Director, Americans for Financial
Reform provided a background of the differences between Titles I and II of the
Dodd-Frank Act, and argued that people “intentionally conflate” these two
titles despite their differences. He also explained the differences between the
single point-of-entry and multiple-point-of-entry resolution strategies.
Stephen Lubben, Chair in Corporate
Governance, Seton Hall Law
Lubben
explained that the conventional bankruptcy regime provides that an insolvent
company cannot give away or sell its assets for less than fair value. However,
he asserted that some financial institutions’ public resolution plans appear to
allow such “fraudulent transactions,” which he suggested could result in
lawsuits brought against the subsidiaries that receive such funding transfers
during a crisis. Lubben argued that this observation highlights that the
publicly available resolution plans for financial institutions contain a
“violation of […] bankruptcy 101.”
Bruce Grohsgahl, Professor in Bankruptcy Law, Delaware
Law School
Grohsgahl
explained that most companies that file for conventional bankruptcy protection
must continue to borrow enough money to fund restructuring and operations,
which he claimed is a “daunting task.” Grohsgahl suggested that this issue
remains unresolved for financial institutions entering into bankruptcy, as he
explained that the banks’ public resolution plans contain “dubious” assumptions
about resolution funding sources, including intercompany payables which he
argued would take years to legally “sort out” and asset sales that take time to
apply. As a result, he suggested that there be limits on
cross-collateralization and cross defaults, as well as more extensive stay
protection.
Simon Johnson, Professor of Entrepreneurship,
MIT Sloan School of Management
Johnson
argued that the industry has made progress with regard to Titles I and II.
However, Johnson argued that policymakers “are a very long way from solving
[the TBTF] problem” because: 1) the living wills filed by large bank holding companies
are “completely non-credible;” 2) cross-border cooperation in the next crisis
will be an “absolute disaster;” and 3) the prudential measures which aim to
reduce the likelihood of failed financial institutions have not really resulted
in “dramatic” increases in capital as some allege. Rather, he asserted that
capital levels of large banking institutions in the U.S. only grew from 4% of
equity relative to tangible assets during the crisis to 5% today.
Johnson
asserted that the Brown-Vitter bill was a “great idea” but is not being
implemented, and he suggested that policymakers consider ways to “make banking
boring,” such as by adopting a modern version of Glass-Steagall, which he
claimed has bipartisan support. Johnson closed by stating that the industry has
“not made enough progress” towards addressing TBTF in any “meaningful
sense.”
Question
and Answer
In
response to a question regarding a bill in the House which would introduce a
new version of Chapter 14 of the Bankruptcy Code, Lubben noted that he testified
in support of the bill in front of the House Judiciary Committee last year. He
stated that the House version of the bill did not repeal Title II, and that
there was no funding mechanism for firms in resolution, so he argued that some
concerns would still be relevant if the Chapter 14 were adopted.
In
response to a question about the barriers to effective cross-border resolution,
Johnson explained that corporate structures vary widely across borders, and
that policymakers would need a treaty with each jurisdiction in order for
bankruptcy to work across borders.
In
response to an audience participant’s question about potential risks in the
credit markets, Johnson suggested that there is no way to know what lies ahead
and, as such, regulators should rely on higher capital standards for banks.
On
the biggest barriers that preclude cooperation between international
regulators, Johnson explained that relying on cooperation between bankruptcy
courts in other jurisdictions under Title I is “completely unachievable;” but
suggested that cooperation between regulatory authorities across borders could
be facilitated through a memorandum of understanding (MOU) rather than a
treaty, however he really thinks that due to local political pressures in a
crisis, this option would be “not attainable.”
In
response to a question regarding how the European Union is addressing these
issues through the Bank Recovery and Resolution Directive (BRRD), Johnson
explained that there are inconsistent national implementation efforts across EU
member states, which make it difficult to discern whether there are policy
responses that will be applied consistently in a crisis.
Panel with Regulators
Stanley
asked the panelists to reflect on Chair Gruenberg’s speech from
May 2015 on the resolution process and goals. Timothy P. Clark,
Senior Associate Director, Banking Supervision and Regulation, Federal Reserve
Board, reminded the audience that the recovery and resolution process is what
comes “after a variety of other things have failed.” Clark noted that there is
“a lot more resiliency in the banking system” due to regulatory efforts to
improve prudential standards, as well as strengthening recovery and resolution preparedness. Clark
recalled that the Fed issued guidance (14-8)
which conveys the Fed’s expectations of how firms should remove impediments to
resolvability, including by de-risking, de-leveraging, and selling assets,
among other themes. In addition, Clark noted that the Fed and FDIC jointly
issued a statement
that identified the shortcomings of the second round of resolution plans
submitted in 2013. He said firms need to understand vulnerabilities in their
corporate structure, such as legal entities that may pose
vulnerabilities. He also pointed to SR letter (14-1)
which in 2014 laid out specific capabilities that the Fed expects firms to have
for resolution and recovery. As part of that, Clark said the Fed expects firms
to understand where vulnerabilities and connections are within and between
legal entities (through use of a management information system).
Supervisory
Examination
Clark
also noted that he runs the Comprehensive Capital Analysis and Review (CCAR)
process at the Fed, which it has mandated for five years to ensure that firms
and their supervisor understand vulnerabilities across an organization.
International
Coordination
Arthur
Murton, Director, Office of Complex Financial Institutions,
Federal Deposit Insurance Corporation, noted that there has been “a lot of
progress made” on the international coordination front since 2008. He explained
that the FDIC resolution team now has relationships with its counterparts at
the resolution authorities in other jurisdictions, and that it hosts a joint
exercise with the UK resolution authorities to simulate how to deal with the
operational complexities of cross-border resolution in the next crisis.
Single
vs. Multiple Point-of-Entry
On
single vs. multiple-points-of-entry strategies, Murton cautioned that people should
expect a firm that goes into resolution to come out “significantly
different” than when it entered.
Stay
Protocol
Murton
also explained that the industry has worked with regulators, including the
FDIC, to introduce early termination rights for derivatives contracts to allow
regulators more time to deal with a crisis. He noted that the International
Swaps and Derivatives Association (ISDA) revised its standard protocol to
impose a temporary stay on early termination rights for derivatives contracts, which
will help ensure that contracts governed by non-U.S. law will be subject to
this treatment. Murton noted that 18 of the largest global financial
institutions have voluntarily adhered to this protocol, and that he expects
regulators to put in place statutory requirements to solidify this
treatment.
Remaining Obstacles to Resolution
Murton
explained that there are five main obstacles to resolution under the bankruptcy
regime: 1) multiple competing insolvency regimes; 2) lack of global
cooperation; 3) capital and liquidity; 4) counterparty actions; and 5)
preserving continuity of critical services. He reiterated that the FDIC has
called for financial institutions to address those shortcomings.
For
more information on this event, please click here.