FRB Governor Tarullo Delivers Speech Regarding Resolution Regimes

Federal Reserve Governor Daniel K. Tarullo gave a speech discussing the progress that regulators have made in recent years toward developing a credible resolution mechanism for systemically important financial institutions. His speech focused in particular on the Dodd-Frank Act's creation, in its Title II, of the Orderly Liquidation Authority, and the subsequent efforts of the Federal Deposit Insurance Corporation (FDIC) to develop that authority. Governor Tarullo emphasized that developing a credible approach to resolution planning was important for at least two reasons: first, unless creditors and counterparties have well-grounded expectations as to how they will be treated in a resolution setting, they may need to charge a premium for the additional uncertainty associated with the disposition of their claims; second, if such creditors and counterparties do not believe the FDIC can successfully resolve the firm, they may not price in the potential for losses that should be incorporated in their dealings with large firms.

In reviewing the FDIC's progress in implementing Title II, Governor Tarullo discussed the FDIC's progress in developing its "single-point-of-entry" approach to resolution of a systemic financial firm, which he characterized as the approach offering the best potential for an orderly resolution under Title II. Governor Tarullo also noted that another way to enhance the credibility of the FDIC's approach is to require adequate loss-absorbing capacity within large financial firms; to that end, he noted that the Federal Reserve and FDIC plan to issue a proposal within the next few months that would require the largest banking firms to hold minimum amounts of long-term, unsecured debt at the holding company level.

See: Governor Tarullo Speech: Toward Building a More Effective Resolution Regime: Progress and Challenges.