Today, the FDIC Board is considering an Advance Notice of Proposed Rulemaking (ANPR), which would be issued jointly with the Board of Governors of the Federal Reserve System, to seek public feedback on steps the agencies can take to improve the prospects for the orderly resolution of large banks in the United States.
In response to the global financial crisis of 2008, the FDIC and the Federal Reserve have promulgated rules and guidance, both jointly and individually, to support the orderly resolution of large banking organizations. Many of these actions focused on the Global Systemically Important Banks (GSIBs), including the requirement that U.S. top tier bank holding companies maintain outstanding minimum loss-absorbing resources on a "gone-concern" or closed basis in resolution, and meet certain other requirements such as the establishment of a clean holding company. However, there are currently no comparable requirements for large non-GSIB banks, which pose significant resolution challenges to the FDIC. These challenges are distinct from those posed by GSIBs, and from smaller community banks as well, where the purchase and assumption transaction by another institution is in most cases a practicable and least-costly option.
These large banks continue to grow, both through organic growth and through mergers and acquisitions. In addition, most of these banks have increased their reliance on large uninsured deposits to fund their operations over the past decade, with uninsured deposits often exceeding 40 percent of total deposits. While the activities of these banks are concentrated in traditional banking activities, certain of these banks have other significant complexities that add to the challenge of resolving the insured bank under the Federal Deposit Insurance Act (FDI Act), including material operations, assets, liabilities and services outside the bank chain. These complicating features can pose challenges due to the potential for discontinuity of operations and the destruction of value. The complexities, as well as the sheer size of these banks, present challenges to the orderly resolution of these large banks under the FDI Act, and increase the potential impact of a possibly costly resolution.
In general, the FDIC's options for the resolution of these large insured banks are limited. Approximately 95 percent of the resolutions conducted by the FDIC since 2007 involved purchase and assumption transactions, generally involving a single acquirer assuming nearly all of the failing bank's liabilities. This resolution approach, particularly applicable to community banks, has generally been the least costly, the least disruptive to depositors and the local community, and the easiest for the FDIC to execute.
However, the size of large banks, by definition, limits the universe of banks with the capability to acquire them if they fail. Even the acquisition of a $50 or $100 billion institution is a significant challenge, both operationally and financially, while only a limited number of the largest institutions, particularly GSIBs, would have the capability to acquire these large banks. Thus, while the ANPR generally focuses on the domestic institutions above $250 billion in total group assets, it contains questions about alternative approaches to scope, and how and whether any new requirement should be applied to the U.S. subsidiaries of foreign banking organizations.
It is clear that the FDIC must have other options for the orderly resolution of these large institutions in a way that minimizes the destruction of value, addresses the impact on depositors and local communities, maintains U.S. financial stability, and minimizes the cost to the Deposit Insurance Fund (DIF). One such option is the formation of a bridge bank, which can be established to take over the operations of the failed institution to allow time for restructuring and marketing the institution – but only if that approach can preserve the franchise value of the failed institution sufficient to make that approach less costly to the DIF than liquidation of the bank and payoff of the insured depositors.
The challenges posed by a large bank failure are illustrated by two examples from the financial crisis: Washington Mutual Bank and IndyMac Bank.
In the case of IndyMac, we saw how the lack of non-deposit liabilities, such as long-term debt, can have an outsized impact on the Deposit Insurance Fund. The failure of the $30 billion thrift institution in 2008 resulted in losses to the DIF of approximately $12 billion - 40 percent of the asset size of the institution.
In contrast, the failure of Washington Mutual Bank (WaMu) with $300 billion in assets, also in 2008 and the largest resolution ever undertaken by the FDIC, resulted in minimal costs to the DIF. This is due in large part to the fact that WaMu had significant long-term debt outstanding at the time of failure – approximately 4.5 percent of total bank assets – which was available to absorb losses in resolution. While in the case of WaMu there was also an acquirer available with the capacity to assume all of the deposits of the bank and in a position to close quickly, we know that is not always an option.
Gone concern resources at the insured depository institution potentially can improve the FDIC's options to complete an orderly resolution of a large bank under the Federal Deposit Insurance Act by increasing the likelihood that a transfer to a bridge depository institution to preserve franchise value would be less costly to the Deposit Insurance Fund and less disruptive to the financial system and local communities than a liquidation of the insured institution and a payout of insured deposits.
Accordingly, the FDIC and the Federal Reserve are considering whether additional measures are warranted to increase the optionality for an orderly resolution of a large bank. This includes whether a layer of loss-absorbing debt held at the bank would be effective in supporting options to resolve large insured depository institutions across a range of scenarios in a manner that is least costly to the Deposit Insurance Fund while minimizing contagion risk and impact to the financial system and local communities. In particular, we would like to consider how to expand the options for resolution without resorting to the sale of the failed institution to another large banking organization or GISB.
In this ANPR, the agencies will explore the effectiveness of a long-term debt requirement in promoting optionality in orderly resolution. The agencies are seeking input on questions such as: how the debt, which could be held at the bank, should be structured and issued; what is the right approach to determining the institutions in scope for such a requirement; what is the right calibration of the amount of any such requirement; and what other requirements should be considered. The agencies also seek to gain a better understanding of how the different alternatives being considered might impact the cost or burden of such requirements.
This is the first step in developing an approach, in conjunction with the Federal Reserve, to address the risks associated with the resolution of large banks, including the risks to the Deposit Insurance Fund, to the customers and counterparties of the banks, to local communities, and to the safety and soundness and stability of the banking system. I am pleased to support this Advance Notice of Proposed Rulemaking.
Finally, I would like to thank the FDIC staff, and their colleagues at the Federal Reserve, for their thoughtful work on this important issue. I look forward to reviewing the comments we receive.