FDIC Chair Gruenberg Says Financial Industry Better Prepared to Address Economic Challenges

FDIC Chair Martin J. Gruenberg observed that the financial industry rebounded from the 2008 crisis. At the Institute of International Bankers' Annual Conference, he emphasized (i) the ongoing recovery of the U.S. banking industry and (ii) new regulatory tools to resolve challenges to systemically important financial institutions ("SIFIs").

Chair Gruenberg pointed to industry results that "convey a sense of the broad-based recovery" among U.S. banks. He noted that almost two-thirds of all institutions reported higher earnings in 2015 than in 2014, and only eight institutions failed last year - the lowest number since 2007. Chair Gruenberg warned that while these figures may suggest recovery, supervisory challenges remain including as to interest rate risk, credit risk and cybersecurity.

With respect to SIFIs, Chair Gruenberg reminded bankers that during the crisis in 2008, policymakers lacked the tools to manage orderly liquidations and were forced to choose between taxpayer bailouts or financial collapse. Today, the Orderly Liquidation Authority ("OLA") exists to ensure that policymakers "will not be faced" with such choices, he said. The OLA has tools that are intended to enable the FDIC to carry out the process of winding down and liquidating a SIFI while insuring that taxpayers do not bear the losses. He maintained that the FDIC has made significant progress in developing the operational capabilities to carry out a resolution if needed.

Chair Gruenberg also elaborated on cross-border cooperation among the major jurisdictions, revisiting relationships and protocols developed with foreign regulatory authorities to address cross-border issues. One major advancement has been in qualified financial contracts ("QFCs"). International collaboration has resulted in an expanded protocol to allow for the continuation of derivative contracts, a major QFC component, when a resolution process is initiated. Another important initiative has been taken on the Total Loss Absorbing Capacity ("TLAC") standard, a broad international agreement, on the long-term debt holdings required to provide loss-absorbing capacity in the event of an institution's failure.

Chair Gruenberg argued that the net effect of these post-crisis developments is a system that is more resilient to shocks than it was before the crisis.