Big Banks Can Be Dismantled, Say U.S. and U.K. Regulators

Even one of the largest global banks could be taken apart safely by U.S. government authorities if it were to fail today, according to banking regulators from the U.S. and U.K.

A U.S. plan for seizing and liquidating a major bank would work if necessary, although it would be messy, according to Art Murton, a senior Federal Deposit Insurance Corp. official in charge of planning how to dismantle complex firms, and Bank of England Deputy Governor Paul Tucker. They spoke yesterday at an Institute of International Finance event in Washington.

“I think U.S. authorities could do it today -- and I mean today,” said Tucker, who has worked with U.S. regulators on cross-border hurdles to taking down an international firm. “A global financial system will not survive if we don’t crack this problem.”

The 2010 Dodd-Frank Act empowered the FDIC to seize a firm and dismantle it if regulators think it can’t pass through bankruptcy without posing a significant threat to the financial system. This so-called resolution authority hasn’t yet been tested, nor have the regulators finished telling banks how it will work.

“We are prepared,” Murton said, adding that the agency is still trying to work out the difficult cross-border issues and will be even more ready in another year.

Written Description

The FDIC is poised to release a written description of how it would liquidate such a firm, using what’s known as a single-entry approach to take over its holding company, impose losses on shareholders and let healthy subsidiaries stay open. Government officials and bankers alike have called for a process that will assure markets that the largest banks won’t need future bailouts and are no longer too big to fail.

“People are not going to trust banks if they feel that we continue to socialize our losses and walk away when things blow up,” Deutsche Bank AG Co-Chief Executive Officer Anshu Jain said yesterday. “Too big to fail has to be addressed, and that cannot be done by banks alone. We need regulators. We need countries to sit down and work out the very complex legal framework.”

Tucker, who is leaving the Bank of England, repeated an earlier statement that the U.K. is prepared to step aside if the U.S. starts resolving a big domestic bank with a U.K. presence.

“We, the U.K., need a reciprocal agreement from United States authorities,” he said, adding that he understands the U.K. approach should be further settled before it can expect “that reciprocal statement of principal.”

Living Wills

While U.S. regulators hammer out this last-resort scenario for handling bank failures, the law says the global banks have to figure out how to go bankrupt safely. Dodd-Frank required banks to file so-called living wills, which are meant to describe how a major bank could undergo bankruptcy without damaging the financial system.

If the FDIC and Federal Reserve aren’t satisfied that the big banks are prepared for their own safe demise, the companies could be forced by the regulators to restructure or sell off pieces.

The biggest banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., filed a second round of the plans earlier this month. The first round last year fell short of what regulators need to see, according to Jim Wigand, who stepped down this year as the FDIC official responsible for planning for big-bank failures. Wigand said earlier this year all the banks had to do more to make their plans credible.

“We have to eliminate too big to fail,” JPMorgan CEO Jamie Dimon said yesterday. “We all know that.”

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