Systemically important financial institutions in the U.S. may have to simplify their business if they can’t provide viable plans for unwinding themselves in a crisis, a senior Federal Deposit Insurance Corp. official said.
“Ultimately, a SIFI could be required to restructure its operations if it cannot demonstrate it is resolvable in an orderly manner under the Bankruptcy Code,” Michael Krimminger, the FDIC’s chief counsel, told a House Financial Services subcommittee today at a hearing in Washington.
The Dodd-Frank Act requires firms deemed systemically important to file plans with the FDIC and the Federal Reserve, laying out how they could be resolved if they should collapse. Lawmakers gave the FDIC authority to resolve complex firms aiming to prevent a repeat of the market tumult that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc.
Companies with at least $50 billion in assets will be required to provide information on debt, funding, capital and cash flows. Firms that fail to file workable resolution plans could be subject to increased capital, leverage or liquidity requirements, and restrictions on growth or operations.
Krimminger, testifying at a Financial Institutions subcommittee hearing on whether the new rules put an end to the notion that some firms are “too big to fail,” said the FDIC anticipates that companies will “pursue the resolution planning process in a way to meet statutory requirements.”
Republican lawmakers, who almost unanimously opposed Dodd-Frank last year, said today the new FDIC powers create another mechanism for taxpayer bailouts of firms that have only grown larger in the wake of the subprime mortgage crisis.
“The truth of the matter is, in times of crises, regulators have always and will always err on the side of more intervention and more bailouts,” said Representative Ed Royce, a California Republican. The agency’s new authority “does little more than facilitate this process.”
Representative Barney Frank, a Massachusetts Democrat who was the co-sponsor of the financial regulation law, said that Republicans were the only public officials keeping the option of bailouts open with their statements. He also disagreed with the idea advanced by Republicans that a designation of systemic importance would serve as a business enhancement for the largest firms. Non-bank financial firms have lobbied regulators to avoid the designation, according to meeting summaries posted on the Fed and FDIC websites.
“The argument is that being considered systemically significant confers on a financial institution an advantage,” said Frank. “Every single large financial institution thinks that’s dead wrong.”
The Financial Stability Oversight Council, the panel of regulators that will determine which firms are systemically important, must clarify what would dictate the designation and the increased oversight that comes with it, Krimminger said.
“The lack of specificity and certainty in the designation process is itself a burden on the industry and an impediment to prompt and effective implementation of the designation process,” he said. “That is why it is important that the FSOC move forward and develop some hard metrics.”
House and Senate Republicans have faulted the 10-member stability panel -- which includes the heads of the Fed, the FDIC and the U.S. Treasury Department -- for a lack of clarity in proposed rulemaking for the designation process.