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From Banking and Finance Law Daily, February 19, 2014

FDIC extends comment due date for proposed single point of entry resolution strategy

By Katalina M. Bianco, J.D.

The Federal Deposit Insurance Corporation has extended the comment period on its proposed “single point of entry” (SPOE) strategy for the resolution of systemically important financial institutions (SIFIs). Comments, originally due on Feb. 18, 2014, now are due by March 20, 2014.

In its release, the FDIC said it was extending the comment due date by 30 days to  allow interested persons more time to consider the SPOE strategy and the issues and questions posed for comment.

Background. Title II of the Dodd Frank Act provides the FDIC with authority to place a SIFI into an FDIC receivership process if no viable private-sector alternative is available to prevent the default of the financial company and if a resolution through the bankruptcy process would have serious adverse effects on U.S. financial stability.

On Dec. 18, 2013, the FDIC published in the Federal Register a proposal detailing the strategy it intends to use if it is called upon to liquidate a SIFI. The FDIC noted that the strategy would allow it to resolve a SIFI within nine months of being appointed receiver and to do so with no cost to the public.

Under SPOE, the FDIC would be appointed the receiver only for a financial organization’s top-tier holding company. A bridge financial company would be created, and the failed company’s assets and subsidiaries would be transferred to it. The bridge company would be recapitalized through a claims-for-securities process, while the failed company would be liquidated, the FDIC says. The failed company’s subsidiaries would continue to operate as subsidiaries of the bridge financial company or, if appropriate, would be placed into bankruptcy.

Requests for extension. In January, a group of industry associations asked the FDIC for more time to analyze the SPOE strategy. The Securities Industry and Financial Markets Association, The Clearing House, American Bankers Association, Financial Services Roundtable, Institute of International Bankers, and Institute of International Finance (Financial Services Roundtable Joint Trade Associations) requested an extension of the deadline for public comment.

The reason given for the request was that the organizations believe that the Federal Reserve Board is planning to issue rulemaking proposals on issues overlapping those covered in the FDIC notice, and the organizations want the benefit of reviewing all such related notices together before commenting on them.

ICBA letter. In a letter commenting on the FDIC’s extension, the Independent Community Bankers of America (ICBA) said it “generally commends the FDIC for its proposed SPOE strategy.” The association agrees that the resolution strategy “would more likely provide stability to financial markets by allowing vital linkages among the critical operating subsidiaries of the SIFI’s holding company to remain intact.” The ICBA also believes that an SPOE strategy would promote market discipline by imposing losses on the shareholders and creditors of the top-tier holding company and by removing culpable senior management without imposing a substantial cost on taxpayers.

However, the ICBA cautions the FDIC that for the SPOE strategy to work, “it is critical that the top-tier holding company maintain a sufficient amount of equity and unsecured debt that would be available to recapitalize and insulate the operating subsidiaries and allow termination of the bridge financial company and the establishment of a new company.”

“Ultimately, we will not know if the SPOE strategy really works until we have another financial crisis. However, significantly higher capital requirements for the SIFIs as well as higher unsecured debt requirements would significantly improve the chances of a successful SPOE strategy,” the association concluded.

Financial Services Roundtable Joint Trades. The Financial Services Roundtable joint trade associations issued its own comment letter on the FDIC’s extension, stating that the associations “believe that the FDIC’s SPOE Strategy is an effective strategy” for resolving global systemically important banking groups (G-SIBs) with top-tier U.S. parent companies (U.S. G-SIBs) and are providing comments to support a strong final notice by the agency detailing how the FDIC will carry out this strategy.

The final notice  “will send a strong signal to investors, counterparties, rating agencies, foreign supervisors and the public at large that the FDIC is prepared to liquidate the top-tier parent of a failed U.S. G-SIB, after using the parent’s full loss-absorbing resources to recapitalize the group’s operating subsidiaries, keeping the subsidiaries open and operating, preserving their going-concern value, continuing their essential operations and distributing the group’s residual value to the failed parent’s creditors in satisfaction of their claims,” the associations wrote.

Systemic Risk Council. In its letter to the FDIC, the Systemic Risk Council noted that the agency’s proposed SPOE strategy has important advantages for speeding, and simplifying, the resolution of potentially systemic financial institutions. Unfortunately, the council said, the strategy also carries with it a number of potential risks that must be addressed for the SPOE strategy to work.

The strategy should:

  • eliminate gaming opportunities;

  • clarify derivatives treatment; and

  • reduce the number of potentially systemic firms.

The council also addressed the importance of bankruptcy. Section 165 of the Dodd Frank Act requires that potentially systemic firms submit living wills that show they can credibly fail in bankruptcy without causing systemic risk and provides the regulators with tools for helping to ensure that they can, the council noted. “If individual firms cannot credibly fail in bankruptcy, then the FDIC and FRB [Fed] have authority to make them simpler and more resolvable in bankruptcy. This is the DFA’s [Dodd Frank Act] policy goal and will ultimately illustrate if policymakers have ended too big to fail.

The council stressed that to meet this goal, policymakers should directly address the impediments to bankruptcy for these types of firms. “Not only could these firms be far simpler and more transparent, but structural impediments such as derivatives preferences and cross-border challenges should not be ignored,” the council said.

Companies: The Securities Industry and Financial Markets Association; The Clearing House; American Bankers Association; Financial Services Roundtable; Independent Community Bankers of America; Institute of International Bankers; Institute of International Finance; Systemic Risk Council.

MainStory: TopStory BankingOperations DoddFrankAct FinancialStability Receiverships

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