Four Key Issues that Must Be Solved Before the Next Big Failure
Two unanswered questions following the crisis are whether the government will allow the next major bank that faces insolvency to fail, and whether the broader financial system would survive such a failure. In a recent speech, Federal Deposit Insurance Corp. Chairman Martin Gruenberg, whose agency was tasked by the Dodd-Frank Act with facing those questions head on, stopped short of declaring victory but emphasized how far the FDIC has come in setting up its new resolution regime. The agency has been continually building international relationships, urging needed flexibility on derivatives contracts and designing a resolution blueprint with options for how to keep “critical” subsidiaries operating during the failure of a parent. “I would call that a pep-talk,” Karen Shaw Petrou, managing partner of Federal Financial Analytics, said of Gruenberg’s speech. But there remain crucial operational issues to sort out before the government could clean up the failure of a massive firm without the risk of the resolution threatening the system.