Featured Product

    GAO Examines GSIB Actions to Mitigate Obstacles for Orderly Resolution

    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

    PRA Revises Branch Return and Updates Guidance for Regulatory Reports

    PRA published the policy statement PS17/19, which contains the final policy related to changes in the format and content of the Branch Return Form and reporting guidance.

    September 12, 2019 WebPage Regulatory News
    News

    FINMA Outlines Treatment of Stablecoins in Supplement to Guide on ICO

    FINMA published a supplement to its initial coin offerings (ICOs) guidelines, outlining the treatment for stablecoins under the Swiss supervisory law.

    September 11, 2019 WebPage Regulatory News
    News

    Ursula von der Leyen Presents Structure of Next European Commission

    President-elect Ursula von der Leyen has presented her team and the new structure of the next European Commission.

    September 10, 2019 WebPage Regulatory News
    News

    FED Proposes to Revise and Extend Reporting Form on Systemic Risk

    FED proposed to extend for three years, with revision, the Banking Organization Systemic Risk Report (FR Y-15; OMB No. 7100-0352).

    September 10, 2019 WebPage Regulatory News
    News

    EBA Issues Revised List of Validation Rules for Reporting

    EBA published the revised list of validation rules (version 2.9) in its implementing technical standards on supervisory reporting.

    September 10, 2019 WebPage Regulatory News
    News

    Bundesbank Publishes Supplementary Validation Rules for Reporting

    Bundesbank published the updated document containing supplementary validation rules in the context of the implementation of the reporting system at national level.

    September 10, 2019 WebPage Regulatory News
    News

    APRA Licenses Xinja Bank as Authorized Deposit-Taking Institution

    APRA granted Xinja Bank Limited a license to operate as an authorized deposit-taking institution without restrictions, under the Banking Act 1959.

    September 09, 2019 WebPage Regulatory News
    News

    FDIC Proposes Revisions to Regulations on Interest Rate Restrictions

    FDIC proposed revisions to its regulations covering interest rate restrictions that apply to less than well-capitalized insured depository institutions.

    September 09, 2019 WebPage Regulatory News
    News

    EBA Intends to Clarify End-Treatment of Grandfathered Instruments

    EBA announced its intention to clarify the prudential treatment applicable to own funds instruments at the end of the grandfathering period, which expires on December 31, 2021.

    September 09, 2019 WebPage Regulatory News
    News

    IMF Releases Reports on 2019 Article IV Consultation with Saudi Arabia

    IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with Saudi Arabia.

    September 09, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3799