Banking and Finance Law Daily Experts hold ‘mixed views’ on GSIBs’ handling obstacles for orderly resolution
Tuesday, December 11, 2018

Experts hold ‘mixed views’ on GSIBs’ handling obstacles for orderly resolution

By Thomas G. Wolfe, J.D.

In response to a request from certain members of Congress, the Government Accountability Office has submitted a report noting that the experts it consulted hold "mixed views" on the ability of global systemically important bank (GSIB) holding companies to mitigate financial and legal obstacles for an orderly resolution under the Bankruptcy Code. In keeping with the Dodd-Frank Act, the Federal Deposit Insurance Corporation and Federal Reserve identified legal and financial obstacles they expected the GSIBs to mitigate to demonstrate their single point-of-entry (SPOE) resolution strategies. Especially in light of federal legislative proposals to amend the Bankruptcy Code to enhance the resolvability of GSIBs, some congressional members asked the GAO to conduct a review of what the GSIBs’ could face in mitigating financial and legal obstacles under the Code.

The GAO’s report (GAO-19-30) is largely based on: (i) the GAO’s review of the procedures and controls outlined by the GSIBs in their respective 2017 resolution plans; and (ii) the GAO’s analysis of expert opinions, academic and industry studies, interviews with five GSIBs as well as federal banking regulators, and legislative proposals to amend the Bankruptcy Code.

Experts’ views. As observed by the GAO in its November 2018 report, because no GSIBs actually have gone through bankruptcy using a SPOE resolution strategy yet, "the potential effectiveness of their controls cannot be known." At the same time, the experts whom the GAO interviewed offered their views on the "five GSIBs’ controls to mitigate obstacles, the need for additional actions, and SPOE strategies." According to the report:

  • most experts viewed GSIB controls to mitigate financial obstacles as "potentially somewhat effective," though some experts expressed concerns about the controls, in part because of "the difficulty of forecasting capital and liquidity needs of subsidiaries and uncertainty about future events in a GSIB failure";
  • on the topic of mitigating financial obstacles, some experts suggested that the federal government provide a failed GSIB’s subsidiaries with access to liquidity to "promote market confidence," but a few experts said that such access "would create moral hazard and reduce market discipline";
  • the experts had mixed views on the potential effectiveness of GSIB controls to mitigate creditor challenges and other legal obstacles, but they supported certain Bankruptcy Code amendments to further mitigate the obstacles;
  • most experts generally supported amending the Bankruptcy Code to limit creditors from challenging a GSIB’s provision of capital and liquidity to its subsidiaries before filing for bankruptcy, but some experts were concerned about "tradeoffs between interests of creditors and the public" associated with that type of Code amendment;
  • most experts stated that a GSIB likely could execute its SPOE strategy successfully if its failure affected only itself, but most experts also viewed success as "unlikely" if the failure occurred "during a widespread market disruption";
  • in connection with the possibility of a "widespread market disruption," some experts said it was important not to repeal the Orderly Liquidation Authority of the Dodd-Frank Act, which allows the federal government, if warranted, to resolve a GSIB outside the parameters of the Bankruptcy Code.

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