FDIC Board Member Highlights Regulatory Challenges to Large Regional Bank Resolution
Commentary by Steven Lofchie
FDIC Board of Directors Member Martin J. Gruenberg highlighted the regulatory challenges posed by a failure of a large regional bank.
In remarks to the Brookings Institution Center on Regulation and Markets, Mr. Gruenberg warned that if a large regional bank (one with assets ranging from $50 billion to $500 billion) fails, the FDIC would have to manage it through a "bridge bank" due to:
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the complexity of managing large branch networks with vast IT systems and "millions of account holders";
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the dependency on funding from credit-sensitive markets, making these "bridge banks" more vulnerable to failure as a result of insufficient liquidity;
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the large number of accounts the institutions hold, creating significant obstacles for the FDIC in quickly determining which accounts were insured;
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a lack of requirements regarding minimum long-term unsecured debt to mitigate losses should the bank fail; and
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a high reliance on uninsured deposits.
Mr. Gruenberg listed several regulatory measures the FDIC has taken to better manage the orderly failure of a regional bank, including:
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mandating large banks establish resolution plans for the insured depository institution in addition to the required holding company resolution plan;
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requiring applicable entities to keep a continual amount of high-quality liquid assets no less than 100 percent of its net cash outflows over a given 30-day calendar period; and
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subjecting entities with over two million deposit accounts to increased deposit data standards to aid the FDIC in making more informed deposit insurance determinations in the event of the institution's failure.
He criticized other regulatory actions taken by the FDIC as increasing the challenges to resolution for regional banks, including the issuance of:
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a final rule to allow certain banks to delay their compliance with the requirement to improve their data and systems from 2020 to 2021;
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an Advance Notice of Proposed Rulemaking that could "weaken the current resolution plan requirements for insured depository institutions";
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a joint final rule that will eliminate the Dodd-Frank Act Title I resolution plan requirements at the holding company level; and
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a joint final rule removing the liquidity coverage ratio requirement for banking organizations with assets between $100 billion and $250 billion.
Commentary
Title II of Dodd-Frank authorized the FDIC to act not only as the liquidator of banks, but also as the liquidator of other large institutions, such as broker-dealers, that might fail. Given that the FDIC has no experience overseeing these institutions, or with the types of transactions that they enter into, or how they manage their funding, or hold their assets, it seems to be extraordinarily wishful thinking on the part of Congress to believe that the FDIC could step in during a crisis and manage a large failing broker-dealer. Wouldn't it make more sense to empower and fund the SEC for this extremely difficult task? At least the SEC would be starting from a more substantial knowledge base.
Given the difficulty that the FDIC would face even in the event of a failure of a regional bank (as described by Mr. Gruenberg,) Congress should consider which regulator is best positioned to deal with a failing securities firm.