Home > Speakers' views
Improving the resilience of the financial sector - Resilience of the EU financial sector in the global context
Resolution of SIFIs: Progress from the FDIC perspective
By Gruenberg Martin J. - Chairman, Federal Deposit Insurance Corporation (FDIC)
Looking back, it is clear that prior to the crisis, policymakers around the world, including in the United States, lacked the necessary authorities to manage the orderly failure of a systemically important financial institution (SIFI) and, as a result, were forced to choose between taxpayer bailouts and systemic disruption.
In the United States, the Dodd-Frank Act, enacted in 2010, established a framework to address these critical gaps in authority, with bankruptcy as the statutory first option and a special public resolution regime, the Orderly Liquidation Authority, as a backstop for circumstances when failure in bankruptcy would likely be disorderly and therefore could threaten financial stability.
To improve resolvability in bankruptcy, the Dodd-Frank Act requires certain firms to file resolution plans explaining how they can be wound down without systemic disruption. This requirement provides a mechanism for authorities to require firms to take steps now to become more resolvable and to address impediments to orderly resolution.
For circumstances in which resolution in bankruptcy threatens financial stability, the Orderly Liquidation Authority provides an essential backstop whereby the FDIC would be appointed receiver of the failed firm. This framework helps to ensure that financial markets and the broader economy can weather the failure of a SIFI without cost to taxpayers; that shareholders and creditors bear losses; that culpable management is held accountable; and that such a firm can be wound down and liquidated in an orderly way.
While we have been working to improve the resolvability of large, complex financial firms domestically, we have also been working internationally as these firms typically operate in global markets. One major step forward was the resolution stay protocol by ISDA, which provides for cross-border application of temporary stays to the termination of derivatives contracts under special resolution regimes and the U.S. Bankruptcy Code. This globally coordinated move served as a foundation for further progress with ISDA’s announcement in November 2015, of an expanded version of the protocol to capture a “wider universe of financial contracts.” Adherence to the protocol by the major global financial firms, including all of the U.S. firms, and implementation through rulemaking by major jurisdictions should reduce the legal uncertainty from termination of derivatives contracts and securities financing in a cross-border resolution. From the U.S. view, these efforts should improve resolution under both bankruptcy and the Orderly Liquidation Authority by helping to address certain cross-border uncertainty and contagion risks in both regimes.
I would suggest that we face no greater challenge today than preparing for the orderly failure of a SIFI. While there is still a lot of work to do, looking at where we were and where we are today, in my view the progress has been impressive.
Another example of progress at the international level is the adoption of the Total Loss Absorbing Capacity Principles and Term Sheet by the FSB. Sufficient loss-absorbing capacity, particularly long-term debt, provides the resources—from private creditors— necessary for the continuity of critical operations enabling the orderly resolution of a firm without cost to taxpayers. These principles should help foster greater cross-border consistency on this important issue.
The establishment in the EU Banking Union of the Single Resolution Board, together with the European Central Bank leading the Single Supervisory Mechanism, has added a major new piece to the international infrastructure for cross-border resolution. The FDIC has worked closely with these authorities, and with authorities from all major financial jurisdictions, including the United Kingdom, Germany, France, and elsewhere in the European Union, as well as Switzerland, and Japan. This cooperation is essential to identifying issues and to addressing cross-border resolution obstacles. Deepening our cross-border relationships with key foreign jurisdictions remains an ongoing priority for the FDIC’s work on systemic resolution.