As the next step in developing the FDIC’s implementation of its authority under the Dodd-Frank Act to resolve systemically important financial institutions (“SIFIs”), FDIC acting chairman Martin Gruenberg outlined the major components of its resolution strategy in a May 10, 2012 speech to the Federal Reserve Bank of Chicago Bank Structure Conference. The FDIC would place the SIFI’s parent bank holding company into receivership and revoke its charter, while allowing its subsidiaries to continue operations with government-provided liquidity, should the Treasury Department and several federal agencies agree that a SIFI presents a risk of systemic consequences. Additionally, the FDIC would transfer most of the troubled SIFI’s assets and some liabilities into a bridge company, which would undergo a swap of debt for equity, similar to a Chapter 11 restructuring under the bankruptcy statutes. The recapitalized company would eventually emerge as a new, private entity.
The process outlined by the FDIC acting chairman is part of the agency’s effort to develop the “orderly liquidation authority” it was granted by the Dodd-Frank Act, and to convince the financial industry that SIFIs neither have an unlimited public backstop, nor will they cause destabilizing disruptions when under financial strain. Additionally, the FDIC has established the Office of Complex Financial Institutions to monitor risk and coordinate with foreign regulators. It has also issued final rules governing the priority of claims under the orderly liquidation authority and requiring SIFIs to submit “living wills” to the FDIC periodically (discussed in the September 20, 2011 Financial Services Alert ). Finally, the FDIC has worked through the Financial Stability Board to develop a statement of “Key Attributes of Effective Resolution Regimes for Financial Institutions” and has engaged with foreign financial regulators on a bilateral basis to plan for joint resolution efforts addressing the cross-border operations of SIFIs and the global nature of systemic risk.