The FDIC today released a new report that explains in detail how it will manage the resolution of a global systemically important bank, should the situation arise. In a speech announcing the report, FDIC Chairman Martin Gruenberg said that a U.S.-based GSIB failure “will be extraordinarily challenging under any circumstances” for the financial system, which is why the agency needed to document ahead of time how it would handle such a situation.
“Needless to say, we have yet to execute an orderly resolution of a U.S. GSIB,” he said. “And look, until we do so successfully, there will be questions as to whether it can be done.”
The report—”Overview of Resolution Under Title II of the Dodd-Frank Act”—explains when and how the FDIC will consider whether a Title II resolution is necessary for a particular financial institution, as well as the operational steps it will take to facilitate a resolution. The paper stresses that the FDIC will hold management responsible for the failure, allocate losses to shareholders and creditors, and return assets and viable operations to private sector control as soon as possible. It also states that consistent with statutory obligations, all losses would be borne by the private sector, primarily the GSIB’s former shareholders and unsecured creditors, and not taxpayers.
Gruenberg said the paper was “particularly timely” given the decision by Swiss authorities last year not to place Credit Suisse into a resolution process following its failure, instead supporting a merger with another bank potentially backed by public funding. “Effectively shareholders of the firm were protected as were the TLAC bondholders, and that has consequences in terms of market expectations that are problematic,” he said in a Q&A after the speech.
