December 10, 2018

The U.S. GAO published a report on financial and legal obstacles global systemically important bank holding companies (G-SIBs) could face under the U.S. Bankruptcy Code. This report describes actions G-SIBs took to mitigate such financial and legal obstacles and analyzes expert views on the effectiveness of the actions, need for additional actions, and likely success of the single point-of-entry (SPOE) strategy. GAO focused on five U.S. G-SIBs with large portfolios of derivatives: Bank of America Corporation, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, and Morgan Stanley.

The five G-SIBs in the review incorporated procedures and other controls in their 2017 resolution plans to mitigate financial and legal obstacles to orderly resolution under the U.S. Bankruptcy Code. Each G-SIB developed a resolution strategy using SPOE—that is, only the G-SIB holding company would enter bankruptcy. Before entering bankruptcy, the holding company would provide its subsidiaries with capital and liquidity to keep them solvent and enable their orderly wind-down or sale. However, a G-SIB could lack sufficient capital and liquidity to keep subsidiaries solvent or face legal challenges from creditors. To mitigate such obstacles, the five G-SIBs estimated the financial needs of subsidiaries under SPOE, pre-positioned loss-absorbing capital and long-term debt at key subsidiaries, conducted legal analysis to identify potential creditor challenges, and took other actions. In their review, FDIC and FED found no deficiencies with the G-SIBs’ 2017 plans. However, since none of the G-SIBs have gone through bankruptcy using SPOE, the potential effectiveness of their controls cannot be known.

GAO reviewed and analyzed academic and industry studies on resolution of large financial firms; public sections of G-SIB resolution plans; laws, regulations, and regulatory guidance on G-SIB resolution plans; and proposals to amend the U.S. Bankruptcy Code. GAO judgmentally selected and interviewed 30 experts (judges, academics, attorneys, other professional service providers, and counterparties) based on their knowledge of the Code and G-SIB resolution. GAO also interviewed federal banking regulators and the five G-SIBs covered by the review of GAO. The experts interviewed by GAO had the following views on the controls of five G-SIBs to mitigate obstacles, on the need for additional actions, and on the SPOE strategies.

  • Most experts viewed G-SIB controls to mitigate financial obstacles as potentially "somewhat effective." However, some experts expressed concerns about the controls, partly because of the difficulty of forecasting capital and liquidity needs of subsidiaries and uncertainty about future events in a G-SIB failure. 
  • Experts had mixed views on the potential effectiveness of G-SIB controls to mitigate creditor challenges and other legal obstacles but supported certain Code amendments to further mitigate the obstacles. Most experts generally supported amending the Code to limit creditors from challenging a G-SIB’s provision of capital and liquidity to its subsidiaries before filing for bankruptcy. However, some were concerned about trade-offs between the interests of creditors and the public associated with such an amendment.
  • Most experts said a G-SIB could likely execute its SPOE strategy successfully if its failure affected only itself. However, most viewed success as unlikely if the failure occurred during a widespread market disruption. In that regard, 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 G-SIB outside the Code.

 

Related Links

Keywords: Americas, US, Banking, US Bankruptcy Code, G-SIB, Too Big to Fail, Dodd Frank Act, Orderly Resolution, Systemic Risk, GAO

Related Articles
News

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
News

OSFI Revises Capital Requirements for Operational Risk for Banks

OSFI is revising its capital requirements for operational risk, in line with the final Basel III revisions published by BCBS in December 2017.

July 18, 2019 WebPage Regulatory News
News

OSFI Consults on Revised Principles for Management of Liquidity Risk

OSFI proposed revisions to Guideline B-6 on the principles for the management of liquidity risk.

July 18, 2019 WebPage Regulatory News
News

ESMA Guidance on Disclosures for Credit Rating Sustainability Issues

ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings.

July 18, 2019 WebPage Regulatory News
News

FASB Issues Q&A on Estimation of Expected Credit Losses by Firms

FASB issued a second question-and-answer (Q&A) document that addresses more than a dozen frequently asked questions related to the Accounting Standards Update No. 2016-13 titled “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

July 17, 2019 WebPage Regulatory News
News

US Agencies Delay Enforcing Volcker Rule Restrictions on Foreign Funds

US Agencies (FDIC, FED, and OCC) announced that they will not take action related to restrictions under the Volcker Rule for certain foreign funds for an additional two years.

July 17, 2019 WebPage Regulatory News
News

SRB Announces SRF Receives Cash Injection, Grows to EUR 33 billion

SRB announced that the Single Resolution Fund (SRF or the Fund) received a cash injection of EUR 7.8 billion from 3,186 institutions in 2019, bringing the total amount in the Fund to about EUR 33 billion.

July 17, 2019 WebPage Regulatory News
News

FASB to Propose to Delay CECL Compliance Deadline for Certain Entities

FASB published a summary of the tentative decisions taken at its Board meeting in July 2019.

July 17, 2019 WebPage Regulatory News
News

IMF Publishes Report on 2019 Article IV Consultation with Vietnam

IMF published its staff report in context of the 2019 Article IV consultation with Vietnam.

July 16, 2019 WebPage Regulatory News
News

European Parliament Elects Next President of European Commission

European Parliament elected Ursula von der Leyen from Germany as the first female President of the next European Commission for a five-year term from November 01, 2019.

July 16, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3476