In this report, FedFin again focuses on the systemic-risk framework critical to the overall Obama Administration Reform Plan. A prior report addressed the new regulatory structure for too-big-to-fail institutions assessing how it creates strong market incentives for breaking apart these firms despite the absence of any express mandate along the lines of the Glass-Steagall Act. Here, we turn to the other critical element of the plan: what to do with any remaining firms that, under stress, pose macroprudential or even macroeconomic risk.
Importantly – and often overlooked, the new plan is significantly different from the systemic-resolution regime outlined by Secretary Geithner last March. We called that proposal “TARP on steroids” because of the unlimited amount of taxpayer support that could be placed behind any big firm any time Treasury thought it appropriate. Now, a significantly tougher process must be followed before systemic-risk assistance flows. Also of note is the new distinction the Administration draws between resolution and rescue, with the plan making clear that it would favor bankruptcy first, receivership next and then intervention only if systemic risk makes failure unavoidable. The resolution framework covers not just too-big-to-fail firms, but also any bank holding company, making it critical to all BHCs regardless of size. They would not only be rescued along the lines outlined above, but also be required to pay for any firms Treasury decides to support – one of the most controversial aspects of the proposal likely to be significantly revised if enacted.
The full text of this report is available to subscription clients.