Bank Regulators See Progress on Cross-Border Resolution Accords

U.S. bank regulators are boosting efforts to set up agreements for shuttering failing banks with officials in overseas hubs such as Switzerland and Japan, said Federal Deposit Insurance Corp. Chairman Martin Gruenberg.

Agencies including the FDIC are building on “significant commonality” with their counterparts in the U.K. and have been in talks with Swiss and Japanese regulators, Gruenberg said today in a speech at the Exchequer Club in Washington.

“I think there is actually potential for the U.S., the U.K. and the Swiss to collaborate together on cross-border resolution,” he said in the remarks delivered before officials from the FDIC, Treasury Department and Federal Reserve testified at a Senate hearing on the topic.

U.S. lawmakers are pressing the Fed and other regulators to eradicate perceptions that a government safety net remains for the largest banks. Fed officials are implementing the Dodd-Frank Act, which requires banks to provide plans for how they would be unwound after a collapse and gives the FDIC authority to resolve complex financial institutions.

Gruenberg -- who pointed out his agency’s cross-border negotiations are focused on the U.K., European Union, Japan and Switzerland -- said that talks are ongoing with Japan, and that he hopes to have a “principals-level meeting” with Japanese regulators this year.

Favored Approach

Switzerland -- home to UBS AG and Credit Suisse Group AG -- is working off the U.S.-favored approach of winding down failed banks through parent holding companies, leaving healthy units operating, Gruenberg said in his speech.

Regulators around the world need to achieve consistency among laws governing the shutdown of a large, global bank, the Fed’s top bank supervisor said in Senate testimony.

“We need to take additional actions to promote regulatory cooperation among home and host supervisors in the event of the failure of an internationally active, systemic financial firm,” Michael Gibson, director of the Fed’s Division of Banking Supervision and Regulation, said in comments prepared for a Senate Banking Committee subcommittee.

“Much remains to be done” to assure consistent procedures for shutting down banks that may have subsidiaries spread through different regulatory regimes around the world, Gibson said.

The Fed and FDIC are using Dodd-Frank’s requirement that banks produce so-called living wills on how to take themselves through a hypothetical bankruptcy as a means to press for changes that will ease the process if they fail, Gibson said.

Learning Experience

After the learning experience of the first round of living wills last year, “it remains to be seen how much progress the firms will demonstrate” in the second round, Jim Wigand, the FDIC’s director of complex financial institutions, said at the Senate hearing.

Wigand said the FDIC board is “prepared to look at its authorities” in correcting deficiencies in the plans, which includes the power to impose additional capital and liquidity requirements and to force banks to divest some operations.

Senator Mark Warner, the Virginia Democrat who leads the National Security and International Trade and Finance subcommittee, said regulators were given “enormous power” to demand banks be safer to dismantle in a crisis.

“I’m personally hopeful that you will use those tools somewhat aggressively,” Warner said.

The Fed and FDIC are also discussing a proposal that would require the largest financial firms to hold a minimum amount of long-term unsecured debt to bear potential losses or help capitalize a bridge holding company for a financial institution being shut down, Gibson said.

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