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May 14, 2012 – Banking regulators' authority to wind down "systemically important financial institutions" is aimed at ensuring taxpayers do not foot the bill when a huge firm – including a holding company or nonbank – falters, FDIC Acting Chairman Martin Gruenberg said last week in Chicago.

Speaking before the Federal Reserve Bank of Chicago Bank Structure Conference, Gruenberg discussed the measures envisioned in resolution rules adopted last year by the Federal Reserve and the FDIC. The rules are to implement the Dodd-Frank Act's mandate for resolving large institutions that pose a threat to the financial marketplace.

A joint rule issued by the FDIC and the Federal Reserve Board last summer provides for the resolution of certain SIFIs: holding companies with consolidated assets of $50 billion or more and certain nonbank financial companies designated by the Financial Stability Oversight Council. FDIC also issued a separate rule that applies to FDIC-insured depository institutions with assets exceeding $50 billion.

Gruenberg, in his speech, focused mostly on holding companies and nonbanks. He said the goals of the resolution strategy are:

• ensuring stability of the financial system;
• ensuring investors in the failed firm bear its losses; and
• converting the failed firm through public receivership into a new, well-capitalized and viable private sector entity.

The resolution process envisioned by the agencies with respect to holding companies and nonbank firms involves a combination of receivership; creation of a new bridge institution; depletion of investors' holdings as needed to absorb losses; and capitalization of the new entity, to which the older firm's business lines would be transferred.

Immediate capital needs, he said, would come initially from write-downs of subordinated debt or senior unsecured debt claims. Remaining debt claims would be converted into equity claims to capitalize the new company. Any additional liquidity required could come from the Orderly Liquidation Fund created within Treasury, but it would have to be repaid either from recoveries on the assets of the failed firm or assessments against the largest, most complex financial companies.

"Taxpayers cannot bear any loss from the resolution of a financial company under the Dodd-Frank Act," Gruenberg said.

Gruenberg said systemically important holding companies and nonbank firms are required under the Fed-FDIC rule to develop, maintain and periodically submit resolution plans to regulators. The first plans, for companies with assets exceeding $250 billion, are due in July.