Michael Gibson, Federal Reserve Director of the Division of Banking Supervision and Regulation, Testifies on Cross-Border Resolution of Large Financial Firms

Michael S. Gibson, Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System, testified before the Senate Committee on Banking, Housing and Urban Affairs regarding the cross-border resolution of large financial firms. Gibson began by reviewing existing regulatory efforts to limit the cost to the broader financial system of a firm's systemic financial failure, noting in particular the progress made by the FDIC in implementing the Ordinary Liquidation Authority ("OLA"). Gibson went on to specify four remaining obstacles to making an orderly resolution of a global systemic firm more feasible:

• Adopting effective statutory resolution regimes in other countries: Gibson noted that, although the United States has had OLA in place since 2010, most other major jurisdictions have not yet enacted analogous reforms.

• Ensuring that systemic global banking firms have sufficient "gone concern" loss-absorption capacity: Gibson noted that the Federal Reserve is considering a regulatory requirement that the largest U.S. banking firms maintain a minimum amount of outstanding long-term unsecured debt on top of their regulatory capital requirements.

• Completing firm-specific cooperation agreements with foreign regulators: Gibson stated that, because OLA can only apply to U.S.-chartered entities, foreign subsidiaries and branches of a U.S.-based systemic financial firm could be ring-fenced, or wound down separately, under the insolvency laws of their home country, which could be "disruptive." Gibson asserted that further progress on cross-border resolution will likely require significant bilateral and multilateral agreements among U.S. regulators and foreign central banks and supervisors.

• Coordinating consistent treatment of cross-border financial contracts: Gibson noted the concern that counterparties to financial contracts with the foreign subsidiaries and branches of a U.S. firm may have contractual rights and substantial economic incentives to terminate their transactions as soon as the U.S. parent enters into resolution. In addressing these issues, Gibson lent the Federal Reserve's support to ongoing efforts by regulators and the industry to modify contractual cross-default and netting practices.

Click here to view testimony in full (links externally to FRB website).See also: Testimony by FDIC's James R. Wigand, Director, Office of Complex Financial Institutions.