11 April 2024

Breaking Down the FDIC's Latest Strategy for Managing Big Bank Failures

The Federal Deposit Insurance Corporation (FDIC) has published its playbook for resolving large banks. Here are the highlights for GRC pros: 

Single Point of Entry Strategy

A key highlight of the report is the FDIC’s Single Point of Entry (SPOE) resolution strategy. Under this approach, only the parent holding company of a failed institution would be placed into resolution, while its subsidiaries remain open and operating. The SPOE strategy aims to minimize disruption and mitigate systemic risk by maintaining the continuity of the failed institution’s critical operations and material subsidiaries.

Title II Resolution Process for U.S. GSIBs

For U.S. Global Systemically Important Banking Organizations (GSIBs), the FDIC has outlined the decision-making process and operational steps for implementing a Title II resolution under the Orderly Liquidation Authority provided by the Dodd-Frank Act.

The process begins with contingency planning when a GSIB is under financial stress. The FDIC and other authorities will assess the situation and determine whether a Title II resolution is necessary, following the “three keys” process if deemed appropriate.

If a Title II resolution is initiated, the FDIC will be appointed as receiver and will take the following key steps:

  1. Place the parent holding company into receivership.
  2. Establish a Bridge Financial Company (BFC) and transfer most of the failed GSIB’s assets and some of its liabilities to the BFC.
  3. Appoint new directors and officers for the BFC to replace those responsible for the GSIB’s failure.
  4. Capitalize the BFC and its subsidiaries using the firm’s internal resources and, if necessary, provide liquidity through the Orderly Liquidation Fund (OLF).
  5. Maintain operational continuity of the GSIB’s critical services and functions.

During the resolution process, the FDIC will work closely with domestic and foreign authorities to ensure coordination and maintain the stability of the GSIB’s operations across jurisdictions.

Once the BFC is stabilized, the FDIC and BFC management will develop and implement a restructuring plan consistent with the FDIC’s overall resolution strategy. This plan may involve selling or winding down certain business lines, operations, or subsidiaries.

The ultimate goal is to return the GSIB’s assets and restructured operations to private-sector control as soon as practicable. The FDIC expects to achieve this through a securities-for-claims exchange, where the BFC’s successor company (or companies) issues new debt and equity securities to the receivership, which are then distributed to claimants by the statutory creditor hierarchy.

Challenges and FDIC Readiness

While the FDIC acknowledges that resolving a GSIB has not yet been undertaken and will come with unique challenges and risks, the report serves as a testament to the agency’s readiness to apply the resolution regime if necessary. Chairman Gruenberg emphasized that an orderly resolution is far preferable to the alternatives, such as resorting to public support or bailing out investors and creditors.

The release of this report marks a significant step towards providing transparency and clarity to stakeholders involved in a Title II resolution. It serves as a valuable resource for risk management professionals, regulatory compliance professionals, internal auditors, and others working in governance, risk, and compliance, who should familiarize themselves with the objectives, tools, and operational steps outlined in the report to better understand the resolution process and its implications for their organizations.

The full report can be read here.

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