Seized Financial Firms May Keep Doing Business in FDIC Plan
The U.S. Federal Deposit Insurance Corp. will let foreign and domestic subsidiaries keep working when the agency uses its power under the Dodd-Frank Act to rebuild failing financial firms, acting chairman Martin Gruenberg said.
When systemically important firms collapse, the FDIC will step in and transfer assets and some liabilities to a temporary bridge holding company, leaving the pre-existing subsidiaries conducting business, Gruenberg said today at a Federal Reserve Bank of Chicago conference.
“We believe this strategy holds the best possibility of achieving our key goals of maintaining financial stability, holding investors in the failed firm accountable for the losses of the company, and producing a new, viable private-sector company out of the process,” Gruenberg said.
Dodd-Frank gave the FDIC authority to seize and unwind systemically important firms, similar to its power to take over failing banks whose deposits are insured by the agency. Being able to credibly close down the largest financial companies -- often called too big to fail -- “is essential to subjecting these companies to meaningful market discipline,” Gruenberg said.
In the FDIC’s plan, original shareholders would be wiped out and debt holders would be given equity in the emerging entity, Gruenberg said. The FDIC would appoint a temporary new board of directors and chief executive “from the private sector” for the bridge company, he said. The new equity holders would then elect a permanent board for the reconstituted company.
The bank regulator is negotiating terms with other countries for the resolution of the big firms, Gruenberg said. The systemically important firms primarily operate in a “relatively small number of jurisdictions,” with much of their non-U.S. business focused in the U.K. In an April 12 speech, he said that dealing with cross-border resolution issues may be easier “than is commonly thought.”
The regulator’s plan was outlined at a Jan. 25 meeting of the FDIC’s Systemic Resolution Advisory Committee. Agency officials, including Gruenberg, mentioned Lehman Brothers Holdings Inc.’s collapse, when its subsidiaries were cut off from liquidity, as an example of the need to support the units.
At the January meeting, James Wigand, who leads the agency’s Office of Complex Financial Institutions, said the structure of major financial institutions makes them unresolvable in a bankruptcy process.
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