Speaking on October 4 at the International Institute of Finance meeting in Istanbul, Turkey, FDIC Chairman Shelia Bair proposed that the “first task” of financial regulatory reform should be to scrap the “too big to fail” doctrine with a view to ending bailouts. Some highlights of her speech, which is available in full text at the FDIC’s website, are set forth below:
- Effective market resolution processes for failing large firms will foster real market disciple
- Firms that pose systemic risks should be required to hold larger capital and liquidity cushions
- There is a need for disincentives for unbridled growth and complexity
- Off balance sheet assets should count as on balance sheet risks
- Necessary reforms include limits on leverage, minimum securitization requirements, better oversight of derivatives and reform of rating agencies
- Firms that are no longer viable ought to fail and actions that prevent firms from failing ultimately distort market mechanisms
- A resolution regime should provide for the orderly wind-down of failing enterprises without imposing costs on the taxpayers
- The basic rule applicable to the failure of an insured bank should be that its holding company and its non-bank affiliates should also be subject to resolution
- Limiting resolution authority to only large and complex bank holding companies is inappropriate because it would reinforce the “too big to fail” doctrine
- Receivers should have broad authority including the power to operate bridge financial companies
- Consideration should be given to legislation that would modify the current priority scheme by limiting the claims of secured creditors to encourage them to monitor risk of financial firms
- Funding needed to avoid a disorderly collapse could be generated from risk-based assessments imposed on large bank holding companies
- Greater harmonization of national laws may be needed to resolve failures of cross-border institutions
- Consideration should be given to requiring that wind-down plans be developed and posted on each institution’s website
- It may be appropriate to apply the resolution process to hedge funds and insurance companies
If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
