FDIC Vice Chair Hoenig Discusses Resolution through Bankruptcy

Speaking at the George Washington University Law School, Federal Deposit Insurance Corporation ("FDIC") Vice Chair Thomas Hoenig offered recommendations as to how systemically important financial institutions ("SIFIs") should structure living wills in order to satisfy their obligations under Dodd-Frank. Title II of Dodd-Frank requires all SIFIs to submit plans, which are called "living wills," to the FDIC and the Board of Governors of the Federal Reserve System to demonstrate how they could be successfully unwound and enter bankruptcy in the event of failure.

The speech was given in response to the FDIC's rejection of living wills submitted by 11 U.S. SIFIs as legally insufficient. Common deficiencies cited by the FDIC include what the FDIC describes as unrealistic assumptions about the availability of capital and funding, and about the actions of government regulators.

To remedy the insufficiencies found in living wills, Hoenig suggested, SIFIs must pay careful attention to the following issues:

• Capital – A SIFI's balance sheet risk may be inadequately captured by its risk-weighted assets capital ratio. The Global Capital Index developed by Hoenig demonstrates that the lack of adequate tangible capital remains among the greatest impediments to successful bankruptcy and resolution.
• Liquidity – SIFIs should assume that, in bankruptcy, their liquidity shock will be severe: banking entities may be sold or taken into FDIC receivership, and broker-dealer affiliates may also enter bankruptcy. In their living wills, SIFIs should outline how their broker-dealers and other affiliates will access unencumbered assets to provide debtor-in-possession financing in bankruptcy.
• Corporate Structure – SIFIs should be realistic about the legal and operational demands of selling or unwinding branch and corporate affiliates, and should outline procedures in their living wills for disentangling banking entities from parent and broker-dealer affiliates.
• Cross-Border – International SIFIs should anticipate the sovereign ring fencing of local funds, and should demonstrate in their living wills how they plan to support operations and maintain links to the payment systems in bankruptcy across international borders.

See: Mr. Hoenig's Speech.