FDIC Systemic Risk Advisory Committee Meeting
Federal Deposit Insurance Corporation
FDIC Systemic Resolution Advisory Committee Meeting
Wednesday, December 10, 2014
Key Topics & Takeaways
- Living Wills: OCFI Deputy Director Herb Held said that while many have talked about the Dodd-Frank Act’s Title I and living wills as a “planning exercise,” it is now a process to transform the regulated institutions.
- Simon Johnson raised concerns about international cooperation on bankruptcy, doubting that a treaty could be agreed to between the U.S. and UK.
- Resolution Plan Transparency: Herring urged that regulators have an opportunity to foster transparency and simplicity by improving the disclosures in public sections of living wills and reconsidering regulations with an emphasis on facilitating transparency, simplicity and orderly resolution
- ISDA Protocol: FDIC staff highlighted the recent ISDA resolution stay protocol, but said that broader coherence would require regulatory action.
- European Single Resolution Board: Olivier Salles said that 2015 will be about preparation as the SRB begins its resolution and planning activities, and that its full responsibilities will “kick in” in 2016.
Speakers:
- Martin J. Gruenberg, Chairman, FDIC
- Arthur Murton, Director, Office of Complex Financial Institutions
- Herb Held, Deputy Director, Office of Complex Financial Institutions
- Robert Burns, Deputy Director, Office of Complex Financial Institutions
- Richard Herring, Jacob Safra Professor of International Banking, the Wharton School, University of Pennsylvania and Co-Director of the Wharton Financial Institutions Center
- Olivier Salles, Head of the Task Force for the Establishment of the Single Resolution Board in the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union
- Ann Battle, Office of Complex Financial Institutions
- Angus Tarpley, Office of Complex Financial Institutions
- Rose Kushmeider, Office of Complex Financial Institutions
Welcoming Remarks
Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg said in his welcoming remarks that the Systemic Resolution Advisory Committee has been of extraordinary value in helping the FDIC address the orderly resolution of systemic financial institutions, which he called one of the most significant challenges that arose from the financial crisis.
Gruenberg noted that in August, the Federal Reserve and FDIC sent letters to the eleven systemically important institutions that submitted living wills. He called it a strong and clear set of letters giving the firms explicit direction on what actions to take to improve their resolvability, and stressed that the need to follow up with the firms’ on their efforts to comply with regulator decisions. In addition, he said the letters emphasized the importance of enhancing the transparency of the living wills.
Turning to international coordination, Gruenberg said cooperation with other jurisdictions is very important, especially with the European Community, noting that the European Parliament approved the Single Resolution Board (SRB). In addition, the United Kingdom, Switzerland, and Japan were the other key jurisdictions to cooperate with in order to make cross-border resolution a reality, he said.
Living Willsand Bankruptcy Update
Arthur Murton, Director of the Office of Complex Financial Institutions (OCFI) and other FDIC staff gave the Committee an update on living wills and bankruptcy. OCFI Deputy Director Herb Held said that while many have talked about the Dodd-Frank Act’s Title I and living wills as a “planning exercise,” it is now a process to transform the regulated institutions. He said the FDIC and Federal Reserve sent a joint letter that identified serious shortcomings and directed the institutions to correct these problems for their 2015 submissions.
Among the issues identified in the 2014 living wills, Held listed unrealistic assumptions about the behaviors of customers and counterparties as well as failures to identify changes in firm structure to enhance prospects for orderly resolution. He further stated that if firms do not sufficiently change the plans for the July 2015 submission, then the agencies expect to use their authority to deem the plans deficient.
Specifically, Held said the FDIC and Federal Reserve expect the plans to demonstrate progress in improving resolvability in a number of ways: 1) establishing a rational and less complex structure; 2) developing a holding company structure that supports resolvability; 3) amending financial contracts to provide for a stay of certain early termination rights of external counterparties; 4) ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process; 5) demonstrating operational capabilities for resolution preparedness; and 6) increasing the transparency of resolution plans by including more information in the public portion of the plans.
Deputy Director Robert Burns emphasized that the FDIC is now committed to being more directly engaged with the firms, by holding more regular meetings and calls to discuss the shortcomings identified in the regulators’ letter, responding to specific questions, and apprising the firms of new supervisory work. Within these discussions, Burns specifically discussed the need for the firms to address interconnectedness among their legal entities to ensure the entities can be sold separately or be wound down in a more orderly manner.
Living Will Expectations
A Committee member asked how the FDIC deals with the reality that in the minds of the institutions’ boards, they will not have passable living wills soon but have still made good progress. Held answered that the changes firms are being asked to make will take time, and that the plans include systems changes that are part of a multi-year process. He explained that the FDIC made it clear that it expects to see plans with timelines, budgets, and goals to which the firms can be held accountable.
Following up, the Committee member commented that the FDIC is really asking the firms for a future bankruptcy plan, but that some are imagining that they need a plan that is “off-the-shelf” now. Murton reiterated that the FDIC expects to see progress, and that the firms understand this. Gruenberg added that this is a question the FDIC will hopefully have a better handle on after the next round of submissions.
Asked about the timetable for the plans and firms’ resolvability, Murton said the next plans are due in July of 2015, and if those plans are not deemed to facilitate resolution progress than the Fed and FDIC would send a notice of deficiency the firms would need to respond to, which could then be followed by sanctions such as higher capital, liquidity, or limits on activity. He then clarified, however, that if “sufficient progress” is seen, than such sanctions would not necessarily be applied.
FDIC Director Jeremiah Norton said it is important to look at each firm individually because it is wrong to presume that each firm is at the same place in resolvability. He warned that signaling that each firm is in the same place could create a disincentive for actual change, and urged individual judgments rather than casting a group view.
Simon Johnson, former governor of the Bank of England and currently a professor at MIT, asked to what extent the FDIC is thinking about how bankruptcy would be handled in other jurisdictions. He said cooperation between bankruptcy judges in the U.S. and the United Kingdom does not seem possible without a treaty, and he insisted that the Bank of England would cooperate on a Title II resolution basis, but not in bankruptcy. Murton said this concern is an impediment to the resolution process, and that firms were directed to indicate whether they assumed cooperation from foreign jurisdictions, and if so to also give the basis for the assumption.
H. Rodgin Cohen, Senior Chairman of Sullivan & Cromwell LLP, said a treaty would be needed, and because it would only require the U.S. and UK it could be completed simply. Johnson denied this, saying “there will never be a treaty” because it could not get through the political processes in either jurisdiction.
Richard Herring of the University of Pennsylvania gave a presentation on resolution plan transparency. He said a core problem in the crisis was the “huge number of opaque interconnections” among globally systemically important banks (GSIBs) that complicated crisis management and impeded regulators’ oversight. While firms are global in life, he said they fragmented into separate legal entities in death and this makes it “enormously difficult” to coordinate resolutions.
Herring said GSIBs today are, on average, more complex than before the crisis, averaging about 1,000 subsidiaries each with activities in an average of 44 countries. In addition, 47 percent of the subsidiaries are non-financial and the firms do not disclose much information on them. Much of this complexity, he added, is actually a result of heavy regulation.
Herring urged that regulators have an opportunity to foster transparency and simplicity by improving the disclosures in public sections of living wills and reconsidering regulations with an emphasis on facilitating transparency, simplicity, and orderly resolution. He cautioned that the current lack of transparency is an impediment to resolvability.
The recommendations Herring made included that: 1) the definition of material entity be standardized; 2) disclosures include an organization chart showing a hierarchy of material entities; 3) information regarding material entities involve disclosures relevant to creditors, counterparties, and regulators; 4) entities not considered material be listed and classified in standardized groups, with explanations as to why they would not be an obstacle to resolution; and 5) foreign branches located outside the jurisdiction in which the entity is chartered, be disclosed.
Further, Herring said that while standards for disclosures in the U.S. should be higher, the rest of the world is doing even less. He stressed that the Financial Stability Board (FSB) has a responsibility to identify GSIBs, and should also be collecting this same information for its own purposes.
Olivier Salles, Head of the Task Force for the Establishment of the Single Resolution Board in the European Commission, gave an update on the SRB’s development. He called the SRB an important step to coordinate actions and stressed that the SRB and Single Supervisory Mechanism are two critical parts of Europe’s banking union. He added that the institutions would create common sets of rules to guide the restructuring of the financial services sector.
The SRB, Salles said, would coordinate with national resolution authorities that member states must establish. He stated that the SRB would monitor all the same institutions monitored by the European Central Bank and could decide to take direct responsibility on specific resolution cases. Salles said 2015 will be about preparation as the SRB begins its resolution and planning activities, and that its full responsibilities will “kick in” in 2016. He further commented that he would like to work with the FDIC because it has decades of experience, while the SRB is brand new.
Coordination with National Authorities
Asked about how the SRB will deal with the national resolution authorities and cross-border transactions, Salles said the SRB is still in the “start-up” phase and that one issue is how quickly national authorities can be established. He further commented that while some states such as Germany and France do not need much guidance, smaller states expect the SRB to tell them everything they need to do through guidelines and manuals.
Resolution Plans
Asked about whether liquidation or restructuring would be the focus of the SRB, Salles said both are an option, and that bailouts and governments absorbing losses are the last resort.
A Committee member asked when banks would be submitting their first resolution plans. Salles responded that this has not been decided yet because the SRB must first build its internal capacity to monitor the plans. However, he did say that partial resolution plans by the end of 2015 would be an “ambitious objective.”
Anne Battle of OCFI gave an update on the International Swaps and Derivatives Association’s (ISDA) Resolution Stay Protocol, issued in November of 2014. The first section of the protocol provides mechanism for the enforcement of the stay provisions under Dodd-Frank Title II to foreign counterparties on insured depository institutions for which FDIC is the appointed receiver, she said. Battle explained that the 18 ISDA firms have opted-in for these provisions on a voluntary basis, but said while they represent a significant segment, they are not the whole market. For broader coherence, she said, regulation would be necessary.
Battle then moved on to the second section of the protocol, which she said creates a limited stay that would apply during general insolvency proceedings. This section, she explained, would take effect upon the effective date of regulation requiring GSIBs and other financial entities to amend their over-the-counter derivatives contracts in a manner consistent with the ISDA’s protocol. Battle stated that the implementation of the protocol is expected to also involve regulatory activity in the U.S.
Johnson questioned how much could be done by the protocol alone and said it appears that legislation will be needed to sort out problems. Battle agreed that the protocol is only what the 18 firms can do on their own until there is further action by Congress or regulators.
Orderly Liquidation Update
TLAC
Angus Tarpley of OCFI said firms need resources to be able to execute a resolution, and that equity was initially seen as the tool to put them in the best position to maximize chances of recovery. A second component of the FDIC’s Orderly Liquidation Authority (OLA) was to develop was some sort of triggering framework to allow resolution authorities to act while an institution can still be saved.
Tarpley stated there was a realization that no matter how much capital a firm has, failures will happen, so it is important that they have something available to absorb losses. This was the “crux of the idea,” he said, that firms need a “minimum quantum” of long-term debt, when FSB began talking about loss absorbing capacity. Eventually, he explained, this led to the total loss absorbing capacity (TLAC) proposal, for which a consultation paper has been published to collect public comment. He commented that TLAC looks at the totality of firms’ instruments and recognizes the need for a core amount of non-equity. He stressed that TLAC is a resolution instrument, not a recovery instrument.
Johnson warned that TLAC is an “illusion” and that the focus should be on equity. Gruenberg said a firm having more equity is always a good thing to reduce the probability of default, but that TLAC is meant to supplement equity requirements with a debt requirement that would be available to manage an orderly failure of a systemic institution with the support of private creditors.
Single Point of Entry
Rose Kushmeider of OCFI spoke about the single point of entry (SPOE) strategy and comments received on it from the public. She said comments generally fell into five categories: 1) global cooperation; 2) liquidity and capital; 3) valuation and claims; 4) exiting from the bridge financial holding company; and 5) subsidiarization. On global cooperation, she said some commenters suggested that the bankruptcy code might be amended to recognize foreign resolution regimes.
On exiting from a bridge financial company, Kushmeider said commenters were split between stressing that the FDIC should focus on maximizing value without regard for breaking up the company, while others said the creation of multiple, less-complex firms should be the goal. On subsidiarization, she said commenters questioned whether requiring companies that are active abroad to use subsidiaries rather than branches would be a good thing.
Winding down
Burns spoke briefly on winding down systemic firms, saying that subsidiaries would stay in business and honor their contracts. He said the living wills from Title I would make wind-downs under Title II more manageable.
A Committee member commented that in Title I, the priority is maximizing value, but that this might not be true for Title II. He said that if there is a different priority, then the public needs to know. He then asked when the FDIC will shift from simply collecting information from firms to actually “giving orders.” Murton said the firms have already been told the FDIC expects significant progress and that they have been given a sense of direction. Gruenberg added that the letters from the FDIC and Federal Reserve were not advisory, and required structural and operational changes to make wind-downs more manageable.
Closing Remarks
In his closing remarks, Gruenberg reiterated that the living will is a tool to start structural changes at systemic firms now, and that the focus is on implementation and ensuring that firms are following through on directions from the FDIC and Federal Reserve.
Gruenberg said these efforts, together with the ISDA protocol, show that a “foundational infrastructure” is being put in place to handle the orderly resolution of systemic firms. He commented that the progress made has been “substantial and rather impressive.”
For more information on this meeting, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Capital/Resolution Authority/SIFIs,Hearing Summaries Agency:FDIC,Publish Year:2014
Federal Deposit Insurance Corporation
FDIC Systemic Resolution Advisory Committee Meeting
Wednesday, December 10, 2014
Key Topics & Takeaways
- Living Wills: OCFI Deputy Director Herb Held said that while many have talked about the Dodd-Frank Act’s Title I and living wills as a “planning exercise,” it is now a process to transform the regulated institutions.
- Simon Johnson raised concerns about international cooperation on bankruptcy, doubting that a treaty could be agreed to between the U.S. and UK.
- Resolution Plan Transparency: Herring urged that regulators have an opportunity to foster transparency and simplicity by improving the disclosures in public sections of living wills and reconsidering regulations with an emphasis on facilitating transparency, simplicity and orderly resolution
- ISDA Protocol: FDIC staff highlighted the recent ISDA resolution stay protocol, but said that broader coherence would require regulatory action.
- European Single Resolution Board: Olivier Salles said that 2015 will be about preparation as the SRB begins its resolution and planning activities, and that its full responsibilities will “kick in” in 2016.
Speakers:
- Martin J. Gruenberg, Chairman, FDIC
- Arthur Murton, Director, Office of Complex Financial Institutions
- Herb Held, Deputy Director, Office of Complex Financial Institutions
- Robert Burns, Deputy Director, Office of Complex Financial Institutions
- Richard Herring, Jacob Safra Professor of International Banking, the Wharton School, University of Pennsylvania and Co-Director of the Wharton Financial Institutions Center
- Olivier Salles, Head of the Task Force for the Establishment of the Single Resolution Board in the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union
- Ann Battle, Office of Complex Financial Institutions
- Angus Tarpley, Office of Complex Financial Institutions
- Rose Kushmeider, Office of Complex Financial Institutions
Welcoming Remarks
Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg said in his welcoming remarks that the Systemic Resolution Advisory Committee has been of extraordinary value in helping the FDIC address the orderly resolution of systemic financial institutions, which he called one of the most significant challenges that arose from the financial crisis.
Gruenberg noted that in August, the Federal Reserve and FDIC sent letters to the eleven systemically important institutions that submitted living wills. He called it a strong and clear set of letters giving the firms explicit direction on what actions to take to improve their resolvability, and stressed that the need to follow up with the firms’ on their efforts to comply with regulator decisions. In addition, he said the letters emphasized the importance of enhancing the transparency of the living wills.
Turning to international coordination, Gruenberg said cooperation with other jurisdictions is very important, especially with the European Community, noting that the European Parliament approved the Single Resolution Board (SRB). In addition, the United Kingdom, Switzerland, and Japan were the other key jurisdictions to cooperate with in order to make cross-border resolution a reality, he said.
Living Willsand Bankruptcy Update
Arthur Murton, Director of the Office of Complex Financial Institutions (OCFI) and other FDIC staff gave the Committee an update on living wills and bankruptcy. OCFI Deputy Director Herb Held said that while many have talked about the Dodd-Frank Act’s Title I and living wills as a “planning exercise,” it is now a process to transform the regulated institutions. He said the FDIC and Federal Reserve sent a joint letter that identified serious shortcomings and directed the institutions to correct these problems for their 2015 submissions.
Among the issues identified in the 2014 living wills, Held listed unrealistic assumptions about the behaviors of customers and counterparties as well as failures to identify changes in firm structure to enhance prospects for orderly resolution. He further stated that if firms do not sufficiently change the plans for the July 2015 submission, then the agencies expect to use their authority to deem the plans deficient.
Specifically, Held said the FDIC and Federal Reserve expect the plans to demonstrate progress in improving resolvability in a number of ways: 1) establishing a rational and less complex structure; 2) developing a holding company structure that supports resolvability; 3) amending financial contracts to provide for a stay of certain early termination rights of external counterparties; 4) ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process; 5) demonstrating operational capabilities for resolution preparedness; and 6) increasing the transparency of resolution plans by including more information in the public portion of the plans.
Deputy Director Robert Burns emphasized that the FDIC is now committed to being more directly engaged with the firms, by holding more regular meetings and calls to discuss the shortcomings identified in the regulators’ letter, responding to specific questions, and apprising the firms of new supervisory work. Within these discussions, Burns specifically discussed the need for the firms to address interconnectedness among their legal entities to ensure the entities can be sold separately or be wound down in a more orderly manner.
Living Will Expectations
A Committee member asked how the FDIC deals with the reality that in the minds of the institutions’ boards, they will not have passable living wills soon but have still made good progress. Held answered that the changes firms are being asked to make will take time, and that the plans include systems changes that are part of a multi-year process. He explained that the FDIC made it clear that it expects to see plans with timelines, budgets, and goals to which the firms can be held accountable.
Following up, the Committee member commented that the FDIC is really asking the firms for a future bankruptcy plan, but that some are imagining that they need a plan that is “off-the-shelf” now. Murton reiterated that the FDIC expects to see progress, and that the firms understand this. Gruenberg added that this is a question the FDIC will hopefully have a better handle on after the next round of submissions.
Asked about the timetable for the plans and firms’ resolvability, Murton said the next plans are due in July of 2015, and if those plans are not deemed to facilitate resolution progress than the Fed and FDIC would send a notice of deficiency the firms would need to respond to, which could then be followed by sanctions such as higher capital, liquidity, or limits on activity. He then clarified, however, that if “sufficient progress” is seen, than such sanctions would not necessarily be applied.
FDIC Director Jeremiah Norton said it is important to look at each firm individually because it is wrong to presume that each firm is at the same place in resolvability. He warned that signaling that each firm is in the same place could create a disincentive for actual change, and urged individual judgments rather than casting a group view.
Simon Johnson, former governor of the Bank of England and currently a professor at MIT, asked to what extent the FDIC is thinking about how bankruptcy would be handled in other jurisdictions. He said cooperation between bankruptcy judges in the U.S. and the United Kingdom does not seem possible without a treaty, and he insisted that the Bank of England would cooperate on a Title II resolution basis, but not in bankruptcy. Murton said this concern is an impediment to the resolution process, and that firms were directed to indicate whether they assumed cooperation from foreign jurisdictions, and if so to also give the basis for the assumption.
H. Rodgin Cohen, Senior Chairman of Sullivan & Cromwell LLP, said a treaty would be needed, and because it would only require the U.S. and UK it could be completed simply. Johnson denied this, saying “there will never be a treaty” because it could not get through the political processes in either jurisdiction.
Richard Herring of the University of Pennsylvania gave a presentation on resolution plan transparency. He said a core problem in the crisis was the “huge number of opaque interconnections” among globally systemically important banks (GSIBs) that complicated crisis management and impeded regulators’ oversight. While firms are global in life, he said they fragmented into separate legal entities in death and this makes it “enormously difficult” to coordinate resolutions.
Herring said GSIBs today are, on average, more complex than before the crisis, averaging about 1,000 subsidiaries each with activities in an average of 44 countries. In addition, 47 percent of the subsidiaries are non-financial and the firms do not disclose much information on them. Much of this complexity, he added, is actually a result of heavy regulation.
Herring urged that regulators have an opportunity to foster transparency and simplicity by improving the disclosures in public sections of living wills and reconsidering regulations with an emphasis on facilitating transparency, simplicity, and orderly resolution. He cautioned that the current lack of transparency is an impediment to resolvability.
The recommendations Herring made included that: 1) the definition of material entity be standardized; 2) disclosures include an organization chart showing a hierarchy of material entities; 3) information regarding material entities involve disclosures relevant to creditors, counterparties, and regulators; 4) entities not considered material be listed and classified in standardized groups, with explanations as to why they would not be an obstacle to resolution; and 5) foreign branches located outside the jurisdiction in which the entity is chartered, be disclosed.
Further, Herring said that while standards for disclosures in the U.S. should be higher, the rest of the world is doing even less. He stressed that the Financial Stability Board (FSB) has a responsibility to identify GSIBs, and should also be collecting this same information for its own purposes.
Olivier Salles, Head of the Task Force for the Establishment of the Single Resolution Board in the European Commission, gave an update on the SRB’s development. He called the SRB an important step to coordinate actions and stressed that the SRB and Single Supervisory Mechanism are two critical parts of Europe’s banking union. He added that the institutions would create common sets of rules to guide the restructuring of the financial services sector.
The SRB, Salles said, would coordinate with national resolution authorities that member states must establish. He stated that the SRB would monitor all the same institutions monitored by the European Central Bank and could decide to take direct responsibility on specific resolution cases. Salles said 2015 will be about preparation as the SRB begins its resolution and planning activities, and that its full responsibilities will “kick in” in 2016. He further commented that he would like to work with the FDIC because it has decades of experience, while the SRB is brand new.
Coordination with National Authorities
Asked about how the SRB will deal with the national resolution authorities and cross-border transactions, Salles said the SRB is still in the “start-up” phase and that one issue is how quickly national authorities can be established. He further commented that while some states such as Germany and France do not need much guidance, smaller states expect the SRB to tell them everything they need to do through guidelines and manuals.
Resolution Plans
Asked about whether liquidation or restructuring would be the focus of the SRB, Salles said both are an option, and that bailouts and governments absorbing losses are the last resort.
A Committee member asked when banks would be submitting their first resolution plans. Salles responded that this has not been decided yet because the SRB must first build its internal capacity to monitor the plans. However, he did say that partial resolution plans by the end of 2015 would be an “ambitious objective.”
Anne Battle of OCFI gave an update on the International Swaps and Derivatives Association’s (ISDA) Resolution Stay Protocol, issued in November of 2014. The first section of the protocol provides mechanism for the enforcement of the stay provisions under Dodd-Frank Title II to foreign counterparties on insured depository institutions for which FDIC is the appointed receiver, she said. Battle explained that the 18 ISDA firms have opted-in for these provisions on a voluntary basis, but said while they represent a significant segment, they are not the whole market. For broader coherence, she said, regulation would be necessary.
Battle then moved on to the second section of the protocol, which she said creates a limited stay that would apply during general insolvency proceedings. This section, she explained, would take effect upon the effective date of regulation requiring GSIBs and other financial entities to amend their over-the-counter derivatives contracts in a manner consistent with the ISDA’s protocol. Battle stated that the implementation of the protocol is expected to also involve regulatory activity in the U.S.
Johnson questioned how much could be done by the protocol alone and said it appears that legislation will be needed to sort out problems. Battle agreed that the protocol is only what the 18 firms can do on their own until there is further action by Congress or regulators.
Orderly Liquidation Update
TLAC
Angus Tarpley of OCFI said firms need resources to be able to execute a resolution, and that equity was initially seen as the tool to put them in the best position to maximize chances of recovery. A second component of the FDIC’s Orderly Liquidation Authority (OLA) was to develop was some sort of triggering framework to allow resolution authorities to act while an institution can still be saved.
Tarpley stated there was a realization that no matter how much capital a firm has, failures will happen, so it is important that they have something available to absorb losses. This was the “crux of the idea,” he said, that firms need a “minimum quantum” of long-term debt, when FSB began talking about loss absorbing capacity. Eventually, he explained, this led to the total loss absorbing capacity (TLAC) proposal, for which a consultation paper has been published to collect public comment. He commented that TLAC looks at the totality of firms’ instruments and recognizes the need for a core amount of non-equity. He stressed that TLAC is a resolution instrument, not a recovery instrument.
Johnson warned that TLAC is an “illusion” and that the focus should be on equity. Gruenberg said a firm having more equity is always a good thing to reduce the probability of default, but that TLAC is meant to supplement equity requirements with a debt requirement that would be available to manage an orderly failure of a systemic institution with the support of private creditors.
Single Point of Entry
Rose Kushmeider of OCFI spoke about the single point of entry (SPOE) strategy and comments received on it from the public. She said comments generally fell into five categories: 1) global cooperation; 2) liquidity and capital; 3) valuation and claims; 4) exiting from the bridge financial holding company; and 5) subsidiarization. On global cooperation, she said some commenters suggested that the bankruptcy code might be amended to recognize foreign resolution regimes.
On exiting from a bridge financial company, Kushmeider said commenters were split between stressing that the FDIC should focus on maximizing value without regard for breaking up the company, while others said the creation of multiple, less-complex firms should be the goal. On subsidiarization, she said commenters questioned whether requiring companies that are active abroad to use subsidiaries rather than branches would be a good thing.
Winding down
Burns spoke briefly on winding down systemic firms, saying that subsidiaries would stay in business and honor their contracts. He said the living wills from Title I would make wind-downs under Title II more manageable.
A Committee member commented that in Title I, the priority is maximizing value, but that this might not be true for Title II. He said that if there is a different priority, then the public needs to know. He then asked when the FDIC will shift from simply collecting information from firms to actually “giving orders.” Murton said the firms have already been told the FDIC expects significant progress and that they have been given a sense of direction. Gruenberg added that the letters from the FDIC and Federal Reserve were not advisory, and required structural and operational changes to make wind-downs more manageable.
Closing Remarks
In his closing remarks, Gruenberg reiterated that the living will is a tool to start structural changes at systemic firms now, and that the focus is on implementation and ensuring that firms are following through on directions from the FDIC and Federal Reserve.
Gruenberg said these efforts, together with the ISDA protocol, show that a “foundational infrastructure” is being put in place to handle the orderly resolution of systemic firms. He commented that the progress made has been “substantial and rather impressive.”
For more information on this meeting, please click here.