‘Everything’s on the table’ for Fed, FDIC as they weigh resolution reform

By Kyle Campbell

Bank regulators have sparked debate among policy specialists about what requirements should be imposed on large banks to make sure they can fail without harming the broader financial system.
Last week, the Federal Reserve and the Federal Deposit Insurance Corp. issued an advance notice of proposed rulemaking on large-bank resolution standards. In it, the agencies asked for public input on a dozen subjects relating to potential requirements ranging from long-term, loss-absorbing debt to plans for key assets to be liquidated individually……”The [Insured Depository Institutions] have gotten so big that the traditional approach the FDIC has to deal with them is, at best, creaky and more likely not viable under stress,” said Karen Petrou, founder and managing partner of Federal Financial Analytics. The resolution plan requirements currently imposed on large banks have made them more resilient than pre-Dodd-Frank, Petrou said. She also noted that bank holding companies in these categories tend to meet the standard of “clean” already, and their underlying depository institutions are all insured, so additional regulatory requirements have not been necessary. Yet, one element of the large-bank resolution that warrants revisiting is the “least-cost test,” Petrou said. A provision of the 1991 FDIC Improvement Act requires the FDIC, when overseeing the resolution of a failed bank, to liquidate the institution’s assets at the lowest cost possible to the public. Petrou said updating the least-cost standard, or at least clarifying its applicability under the current regulatory framework, should be a key goal for the FDIC as it revisits its resolvability practices.