Managing the orderly failure of a large, complex financial institution is the FDIC’s "greatest untested resolution challenge," according to FDIC Chairman Jelena McWilliams.
While the Federal Deposit Insurance Corporation has more than 85 years of experience in resolving small banks, it has less experience in handling the challenges posed by resolving larger institutions, according to FDIC Chairman Jelena McWilliams. In remarks prepared for the 30th Special Seminar on International Finance, McWilliams pointed to challenges that arise from large bank funding structures, size, and operational complexity, and their interconnectedness with other institutions, as factors that could influence how and when such a bank should be resolved.
While small banks often can be resolved through an acquisition by a solvent bank, larger institutions are more likely to call for the use of a bridge bank, McWilliams observed. In that case, the regulator would need to keep the failed bank in operation, both to protect depositors and maximize the bank’s value in receivership. She cited the IndyMac Bank failure as an example of the issues that can arise and added that resolving the bank eventually cost the Deposit Insurance Fund $12.4 billion.
Lessons learned. The largest U.S. bank holding companies, and some foreign banking organizations that operate in the United States, now must have approved resolution plans, McWilliams pointed out. These have resulted in some simplification of legal structures and other improvements that will allow them to fail in an orderly manner.
The IndyMac experience led the FDIC to require large banks to keep records on their derivatives, securities lending, and repurchase agreement contracts that will help the agency decide whether to transfer these investments. Another regulation imposes record keeping and operational systems requirements that will ensure a receivership can give depositors quick access to their deposits.
Other challenges. McWilliams observed that the FDIC could be called on to resolve a central counterparty or other nonbank entity if U.S. financial stability were threatened. The agency has fewer tools for this, she said, including only a limited ability to plan.
While there have been no failures due to a cyber-incident, such a failure could "produce consequences that spread by the minute or the second, rather than by the hour or the day," McWilliams warned the seminar. The FDIC has been offering banks tools that will help enhance their cybersecurity and preparedness.
Companies: IndyMac Bank, F.S.B
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