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.
Keywords: Americas, US, Banking, US Bankruptcy Code, G-SIB, Too Big to Fail, Dodd Frank Act, Orderly Resolution, Systemic Risk, GAO
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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