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The Orderly Resolution of Global Systemically Important Banks: An Update from the FDIC

Chairman Martin J. Gruenberg
 Speech, Peterson Institute for International Economics   Video
April 10, 2024

I would like to thank the Peterson Institute, and its President, Adam Posen, for giving me the opportunity today to share some thoughts about a topic of vital importance to U.S. financial stability – the orderly resolution of Global Systemically Important Banks – or GSIBs as they are called.

Prior to the Global Financial Crisis of 2008, it was generally assumed in the United States and in other major jurisdictions of the world that GSIBs were unlikely to fail.  The diversified business models of these firms combined with their diversified geographical operations supported the perception that there was little need to devote regulatory attention or resources to their potential failure.

The massive public support provided to these institutions in the United States and elsewhere to prevent their failure during the 2008 crisis shattered that perception. They could indeed fail. As a result, in the United States, Title II of the Dodd-Frank Act, enacted in 2010, provided the FDIC with dramatically expanded authorities to manage the orderly failure of a U.S. GSIB, or for that matter any financial company whose failure was deemed to pose a risk to U.S. financial stability.  Similar authorities were provided to financial regulators in other major jurisdictions of the world.

Since that time, the FDIC has been working diligently to develop the capability to use the expanded authorities provided for GSIB resolution under the Dodd-Frank Act.  Today the FDIC is releasing a paper – Overview of Resolution Under Title II of the Dodd-Frank Act – which describes the progress we have made and provides the most comprehensive explanation to date of how the FDIC expects to utilize those authorities. 

I would like to use the opportunity of this speech to explain at a high level the contents of the paper.  We believe it is of critical importance to the success of our efforts that the financial markets, policymakers, and the public have the clearest explanation possible of how the FDIC expects to manage the orderly resolution of a GSIB.  That is the goal of the paper and my comments today.

As I indicated, the ability of the FDIC and other U.S. regulatory authorities to manage the orderly resolution of large complex financial institutions remains foundational to U.S. financial stability.  While recognizing the progress that has been made toward enabling such a resolution, we also recognize that the resolution of a GSIB has not yet been undertaken.  When it becomes necessary to do so, carrying out such a resolution will come with a unique set of challenges and risks.  However, an orderly resolution is far more preferable to the alternatives, particularly the alternative of resorting to taxpayer support to prop-up a failed institution or to bail-out investors and creditors. 

With this paper the FDIC is reaffirming that, should the need arise, we are prepared to apply the resolution framework that the FDIC and other regulatory authorities in the U.S. and globally have worked so hard to develop. 

In that regard, we believe this paper is particularly timely in light of the decision by Swiss authorities last year not to place Credit Suisse into a resolution process, which the Swiss had developed consistent with the international standard adopted by the Financial Stability Board (FSB) after the 2008 crisis – The Key Attributes for Effective Resolution Regimes for Financial Institutions.  Instead the Swiss chose to facilitate an open institution acquisition of Credit Suisse with public support.  This was done despite the view, as detailed in an FSB report released last year, that the cross-border resolution framework was sound and that a resolution was ready to be implemented by the Swiss authorities.1

In my remarks today, I will provide an overview of the resolution planning and policy developments supporting an orderly resolution of a GSIB under Title II, including the utilization of the Title I resolution plans or living wills, the development of the single-point-of entry strategy, rulemakings that have been implemented, and progress on international cooperation.

Of particular note, I will discuss in greater detail than has been provided previously the key operational steps for a U.S. GSIB Title II resolution – launching the resolution, stabilizing the operations of the failed firm, and exiting from resolution.

This discussion can get a bit technical, so please bear with me because it is important.

Resolution Planning and Policy Developments Supporting Title II

Let me begin by reviewing resolution planning and policy developments supporting a Title II GSIB resolution.

First, as required by the Dodd-Frank Act, multiple cycles of Title I resolution plans, often called living wills, have been and continue to be a very valuable part of our preparations for resolution.  These plans require the largest U.S. bank holding companies to demonstrate how they could be resolved under the U.S. Bankruptcy Code without severe adverse effects on U.S. financial stability and without taxpayer support. As part of the Title I process, the U.S. GSIBs have enhanced their resolvability in various ways including by: 

  • identifying  options for shrinking and divesting their businesses in resolution to reduce their systemic footprint;
  • streamlining their organizational and funding structures; 
  • developing capabilities to estimate material subsidiaries’ liquidity and capital needs in resolution;
  • building governance frameworks with specific triggers to promote timely action when a firm begins to encounter stress; 
  • planning for operational continuity in resolution; and 
  • improving transparency to markets and investors with public versions of their resolution plans and securities markets disclosures. 

While the strength of these plans and capabilities varies across firms, Title I provides a valuable process for ongoing supervisory review and improvements.  Each iteration of these plans helps to strengthen the resolvability of these large, complex banking organizations and to keep our planning up to date with the firms’ current business model and market developments. In short, the work that firms put into these plans is vital to making an orderly resolution more feasible.

Turning to Title II resolution, the FDIC’s development of the Single Point of Entry (SPOE) resolution strategy, which we announced in 2013, was a critical step forward in the FDIC’s thinking about how to address the challenges of resolving large, complex financial institutions, and remains foundational to our planning.2 In an SPOE resolution, only one legal entity, the parent holding company is placed into resolution. 

The ownership interests in the underlying subsidiaries are transferred from the failed parent company to a new Bridge Financial Company under the control of the FDIC.  Under the SPOE strategy, material subsidiaries remain open and operating while we proceed through an orderly resolution.  This protects depositors, preserves value, and promotes financial stability.  In an SPOE resolution, the failed holding company’s shareholders and unsecured creditors are not transferred to the Bridge Financial Company, become claimants against the receivership, and will ultimately absorb the losses of the firm.  There would be no taxpayer support, and the board and senior executives of the failed firm would be removed.

To help operationalize an SPOE resolution, in 2017 the Federal Reserve and other authorities finalized a number of rules that help make SPOE work.          

  • The Federal Reserve’s rule on minimum Total Loss Absorbing Capacity (TLAC) and long term debt (LTD) ensures sufficient private sector capacity is available to absorb the losses and recapitalize the institution in resolution;
  • The “clean holding company rule” limits the liabilities of GSIB holding companies that are not long term debt, which helps reduce complications and competing claims of the holding company creditors in resolution; and
  • Requirements for GSIBs to provide for stays on counterparty actions for Qualified Financial Contracts (QFCs), such as derivatives and repos, mean that QFCs can be easily transferred to a Bridge Financial Company or other new owner and not disrupt core financial markets.

Finally, because operations of GSIBs are global, the FDIC has invested enormous effort to promote international cooperation with our key counterpart jurisdictions. Our work together has resulted in robust mechanisms to:

  • pre-position resources to support the recapitalization of subsidiaries in an SPOE resolution;
  • meet regularly with home and host authorities to discuss firm-specific resolution plans in Crisis Management Groups; and 
  • continue to engage with cross-border counterparts at all levels to test our operational preparedness. These engagements include biennial principal-level resolution planning exercises with our UK and European Banking Union counterparts.

Together, these planning and policy developments support the FDIC’s preparedness to undertake a Title II resolution.

Operational Steps for a U.S. GSIB Title II resolution 

A Title II GSIB resolution will be a challenging process under any circumstance, with a number of steps that need to be taken quickly and in close coordination with a range of stakeholders.  Generally, we plan for three stages of resolution: launching the resolution, stabilizing the failed firm's operations, and exiting the resolution.   Let me provide some more detail on our preparations and expectations for each of these stages. 

Launching the resolution

When a GSIB approaches failure, the FDIC and other authorities would take up that specific case to decide, under those circumstances, whether, when, and how the Title II framework would be used.  The multi-agency process and statutory factors guiding this decision are clearly laid out in Title II of the Dodd-Frank Act. This process is often referred to as the “three keys process,” because it requires recommendations from two federal agencies – the Federal Reserve and the FDIC in the case of most GSIBs – followed by a determination by the Secretary of the Treasury, in consultation with the President, to commence a Title II receivership.3

Part of the decision making is a determination that using Title II would mitigate the adverse effects of the firm’s failure and resolution in bankruptcy.  Unlike a resolution under the Bankruptcy Code, a Title II resolution is managed by the FDIC as receiver.  It provides for the Orderly Liquidation Fund (OLF) at the U.S. Treasury as a line of credit to the FDIC to serve as a temporary backstop source of liquidity. Any utilization of the OLF will be repaid with the assets of the failed firm with no taxpayer exposure. 

Access to the OLF requires an Orderly Liquidation Plan agreed upon with the Secretary of the Treasury that lays out the expected resolution strategy.  As described above, the FDIC expects that the Orderly Liquidation Plan would be based on an SPOE strategy, which the FDIC considers the most suitable resolution strategy in a range of potential scenarios involving resolution of a U.S. GSIB.  The SPOE strategy would mitigate financial stability risk, keep key subsidiaries open and operating, and continue critical operations. 

Launching the actual entry into resolution involves a number of steps that happen concurrently.  For a GSIB resolution using an SPOE strategy, the parent holding company of the failed GSIB is placed into receivership.  The FDIC, as receiver, would establish a Bridge Financial Company under its control, and determine the leadership and governance; transfer the operating subsidiaries to the Bridge Financial Company; and commence the claims process.

Importantly, at the point of entry, the board of directors of the failed GSIB and senior executives who were responsible for the failure would not be retained by the Bridge Financial Company.  The Dodd-Frank Act also provides authority for compensation clawbacks for senior executives who are considered to be substantially responsible for the company’s failure.  As mentioned previously, the failed firm’s shareholders and creditors will ultimately absorb the losses of the firm, with no taxpayer exposure.

The FDIC has prepared for these steps in advance.  We have drafted legal documents to establish the bridge company and its governance structure, built a program that maintains a roster of qualified and vetted executives to run the Bridge Financial Company, and retained contractors to scale up work on communications, employee retention, and claims administration.  Throughout this process, the FDIC aims for a balanced approach to bridge governance and oversight, with the FDIC retaining control over key strategic decisions and ensuring compliance with the Orderly Liquidation Plan and repayment of the OLF while the new Bridge Financial Company’s leadership manages the day-to-day operations. 

Stabilizing the operations of the firm

The second stage of resolution – stabilization of the operations – begins as soon as the firm enters resolution.  A key advantage of the SPOE resolution strategy is that by keeping material subsidiaries open and operating, it enables the firm’s material operations to continue.  The newly formed Bridge Financial Company would be backed by OLF liquidity or guarantees to the extent needed, and have a strong balance sheet with ample capital because the failed firm’s liabilities were left behind in the receivership to absorb losses, while the assets were transferred to the Bridge Financial Company. 

This puts the Bridge Financial Company in a strong position to use its internal resources to take any actions that may be needed immediately upon entry into resolution to recapitalize material domestic and foreign subsidiaries, provide liquidity support, and maintain continuity of operations. 

These actions will be supported by a comprehensive communications effort coordinated among the FDIC, other U.S. and international authorities, and the Bridge Financial Company.  This effort will be designed to provide clarity and understanding of the resolution to a range of critical stakeholders —including staff of the Bridge Financial Company and its subsidiaries, customers, counterparties, various public authorities, and the wider public. 

Let me be clear: While SPOE means the original holding company would fail, with the consequences of failure, the new Bridge Financial Company and its material subsidiaries will be open and operating. Market participants should be confident that these subsidiaries will continue providing critical services and functions to the market and fulfill contractual obligations to employees, counterparties, and customers. 

Exiting from resolution

Once the operating subsidiaries are stabilized, the FDIC and Bridge Financial Company management expect to focus on developing and implementing the restructuring and wind down plan.  Leveraging the GSIB’s Title I plan, the FDIC will have analyzed prior to the failure possible restructuring, divestiture, and wind-down actions to occur in resolution and incorporated its own expectations into the resolution strategy for the firm.  The type and extent of restructuring will depend on the nature of its business, the causes of failure, and the economic and market conditions at the time.  For example, an appropriate restructuring plan could include selling subsidiaries or specific business lines; winding down or liquidating specific portfolios, business lines, or subsidiaries in an orderly manner; or breaking up certain operating subsidiaries for sale or spin-off.

Any restructuring will aim to maintain value, continue or transition critical operations, address the causes of failure, and ensure that the entity or entities emerging from the Bridge Financial Company can be effectively resolved under the Bankruptcy Code (or other ordinarily applicable regime) in an orderly fashion.  Ongoing restructuring and divestiture requirements could also continue after exit from resolution by virtue of conditions placed on acquirers or mandated by other supervisory or regulatory requirements.

The FDIC expects to exit resolution in a timely fashion, with the failed GSIB’s shareholders and creditors, rather than the taxpayers, absorbing the losses of the failed firm.  The FDIC expects that the most likely mechanism for exiting resolution will be a securities-for-claims exchange. In this approach, new debt and equity securities in the successor company (or companies) are distributed to former creditors to satisfy the claims against the receivership.  Once the securities are distributed, the Bridge Financial Company is terminated and the successor company or companies will be owned by the former claimants. 

While the timeline may vary depending on the scenario, completion of all the steps needed for the securities-for-claims exchange—making claims determinations, estimating valuation of any successor company (or companies), and issuing and distributing new securities to claimants —will be arranged during the bridge period, which is likely to take at least nine months. 

This will allow sufficient time for the FDIC and the Bridge Financial Company to issue the audited financial statements, prospectuses, and necessary disclosures in order for the successor company (or companies) to comply with the requirements of federal securities laws. 

Again, our goal is that when a GSIB exits resolution, it no longer presents a systemic threat to the U.S. financial system and can be resolved under the ordinarily applicable resolution regime.  

Conclusion

Let me conclude by acknowledging that a U.S. GSIB failure will be extraordinarily challenging under any circumstances. Needless to say, we have yet to execute an orderly resolution of a U.S. GSIB. Until we do so successfully, there will be questions as to whether it can be done.

The purpose in issuing the paper today is to explain as clearly and in as much detail as possible how the FDIC expects to carry out that critical resolution responsibility.  We believe we have the authorities, resources, and capabilities to do the job if it becomes necessary.  We hope the paper generates interest in this issue.  We stand ready to engage with all interested parties to address questions and build further understanding of the FDIC’s plans and preparedness for executing our Title II Dodd-Frank Act resolution responsibilities for GSIBs.

Thank you.

Last Updated: April 10, 2024