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February 16, 2018

The FDIC Chairman Martin J. Gruenberg spoke about the progress toward resolving systemically important financial institutions or SIFIs, at The Wharton School, University of Pennsylvania. He highlighted the importance of remaining focused on addressing the critical issue of the resolution of SIFIs. He noted that a central objective of his efforts has been on developing the capability for the orderly failure of a SIFI, without taxpayer support, and with accountability for the shareholders, creditors, and management of the failed firm.

Since the financial crisis, orderly resolution of firms has been a top priority for the FDIC, as per Mr. Gruenberg. The framework for resolution of SIFIs, under the Dodd-Frank Act, introduced a new dimension to the regulation of financial institutions in the United States. The Act provided the Title I living will resolution plan process as a tool to require systemic institutions to make real-time changes in their structure and operations to facilitate orderly failure under bankruptcy. In addition, the Title II Orderly Liquidation Authority gave the FDIC new authority to manage the orderly failure of any financial institution whose failure in bankruptcy could pose a risk to the financial system. He also described the evolution of the living will process and the joint work done by FED and FDIC (US Agencies).

He then outlined the progress made through the living will resolution plan process in bringing about tangible changes to the structure and operations of the eight U.S. global systemically important banks (G-SIBs) to enhance the resolvability of these firms. With regard to the most recent resolution plans that the firms filed in July 2017, he noted that G-SIBs in the United States have made substantial progress in the following areas:

  • Established clean holding companies with pre-funded loss absorbing capacity
  • Rationalized their legal entity structures to align those structures and support their preferred resolution strategy
  • Established frameworks for estimating and positioning the capital and liquidity required to execute their preferred resolution strategy
  • Implemented internal escalation triggers, playbooks, and other governance mechanisms to facilitate the timely execution of recovery and resolution actions by the board of directors and senior management
  • Adhered to the ISDA 2015 Universal Resolution Stay Protocol, which provides for temporary stays on certain default and early termination rights for ISDA and other standard derivatives contracts
  • Developed strategies and playbooks to maintain access to payment, clearing, and settlement services
  • Took steps to ensure that inter-company services shared by multiple affiliates will continue to be available in resolution
  • Modified service contracts with key vendors to ensure the continuation of services as long as the firm continues to meet its obligations under the terms of the contract
  • Developed options for sale of discrete businesses and assets under different market conditions to increase the flexibility of a firm's execution of its preferred resolution strategy

The FDIC Chairman concluded that the living wills process has been enormously helpful to firms and regulators by facilitating significant structural and operational improvements to improve resolvability of firms. However, the resolvability of firms will change as markets change and as firms’ activities, structures, and risk profiles change. Thus, US Agencies expect firms to remain vigilant in considering the resolution consequences of their management decisions.

 

Related Link: Speech

Keywords: Americas, US, Banking, SIFI, Dodd Frank Act, Living Will, Resolution Plan, Systemic Risk, FDIC

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