FedFin on: Large-IDI Resolution Plans
Although a pending FDIC/FRB proposal imposes a raft of new requirements for resolution plans from IDIs with over $100 billion in assets, the FDIC has also issued a freestanding proposal doing the same, also setting information-filing standards for IDIs below $100 billion but above $50 billion. Aspects of the resolution-plan filing standards for large covered IDIs (CIDIs) echo and in some cases allow reliance on aspects of the joint rule with the Fed, but the FDIC notes that this rule is, as required by the Dodd-Frank Act, focused on financial stability. Its own IDI resolution rules now and as proposed instead address how the FDIC is to meet its own statutory requirements (e.g., least-cost resolution). The NPR mandates many new planning or filing requirements to achieve its goals, most notably adding new severability standards that may require new inter-affiliate or -branch firewalls that reduce operating efficiencies and, when it comes to broker-dealer or other entities, lead to indirect resolution requirements not mandated by functional regulators.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
Karen Petrou: The PCA Cure for Much That Ails New Banking Rules
It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington. This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks. I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws. But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced. Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often. All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear. Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom: use warning lights that force prompt and corrective action. Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.
The need for new PCA triggers is even more urgent than I thought when I first outlined the importance of essential safeguards that are still missing in all of the agencies’ to-do lists. As we dispiritedly noted last week, the FDIC’s report on First Republic’s failure followed its earlier self-exoneration of Signature’s demise, essentially saying that supervisors did their best – things should have been […]
FedFin on: Living-Will Requirements
In conjunction with proposing a new long-term debt (LTD) requirement for categories II, III, and IV banks, the Fed and FDIC are pursuing other ways to enhance resolvability. Among these is new guidance for large domestic and foreign banking organizations that requires U.S. banking organizations and foreign banking organization (FBO) intermediate holding companies (IHCs) along with all their insured depositories when any is over $100 billion to file resolution plans. These are also redesigned to make the plans much closer in substance to those mandated for GSIBs.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin on: Long-Term Debt Requirements
Building on an advance notice of proposed rulemaking, the banking agencies have issued several proposals to enhance the resolvability of large banking organizations not covered by stringent GSIB standards. Among these is a proposal mandating long-term debt (LTD) to increase regional-bank total loss-absorbing capacity (TLAC) and, the agencies believe, reduce resolution costs and/or increase the FDIC’s options, thus avoiding the systemic designation and costly resolutions that occurred for regional banks earlier this year. The LTD requirements for category II, III, and IV banking organizations do not go as far as those mandated for GSIBs, based instead exclusively on a “capital-refill” construct in which eligible LTD is issued in amounts the agencies believe sufficient to provide enough capital-equivalent funding to achieve the proposal’s expected results.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
Karen Petrou: What Happens When a Bank’s Parent Goes Up in Smoke
I recently bemoaned the Fed’s failure before and after SVB’s collapse to demand source-of- strength backstops from the parent holding company. That these would have materially reduced the FDIC’s cost and thus that of the large banks picking up this tab is still more obvious by the fact that it took the Justice Department to bar big pay-outs to the parent company’s executives. Clearly, there’s still money to be made, just not for anyone else. However, the source-of-strength question takes on still more immediate importance in light of the highly worrisome case of Hawaii Electric. It owns American Savings Bank (ASB), a $9.6 billion insured depository. Some parent-company investors somehow think ASB will bail out the beleaguered Maui electric utility, redefining who is the source of strength. ASB can’t, but that doesn’t mean the insured depository is safe and sound. Without downstreamed parent-company cash in hand to protect it from the utility’s travails, the insured depository and thus the FDIC are sure to suffer.
Yet another formidable post on the Bank Reg Blog lays out the history of how it came to be that an public utility owns an insured depository. Barriers between banking and commerce that Congress didn’t close for BHCs in 1956 were shuttered in 1970 and 1987, leaving only industrial loan companies and unitary thrift holding companies (i.e., parent companies such as Hawaii Electric) as the only ones allowed to own insured depositories. Unitary thrifts were prospectively barred in 1999 and several large grandfathered ones did themselves in during the great financial crisis, (see for bad examples WaMu and GE Capital). This leaves only little-bitty unitary thrifts such as Hawaii Electric’s, but that doesn’t mean the risk is immaterial. Anything but.
Many have blamed the unthinkable scale of Maui’s devastation on Hawaii Electric’s failure to act […]
FedFin on: GSIB Surcharge
As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation. These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards. The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency. It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal. However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion. It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations…
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.