FDIC and Financial Regulatory Reform
FDIC’s Role and Authorities under the New Financial Reform Law
What are the FDIC’s primary new responsibilities under the new law?
Expanded Receivership Authorities
- The new law gives the FDIC broad authority to use receivership powers to liquidate failing systemic financial firms in an orderly manner. These powers are similar to those the FDIC has long used to resolve failed insured depository institutions.
- The FDIC’s new authorities also include conducting a claims process and paying claims, establishing bridge financial companies to facilitate orderly wind-downs of failed systemic financial firms, and transferring qualified financial contracts to bridge companies or third parties.
- The decision to deem a failing financial firm “systemic” (and thus subject to FDIC receivership) will generally be made by the FDIC and Federal Reserve Board, in conjunction with a determination by the Secretary of the Treasury (in consultation with the President).
- If the failing financial company is a broker-dealer or its largest subsidiary is a broker-dealer, the SEC (instead of the FDIC) would help make the systemic determination, and the FDIC would be consulted.
- Similarly, the Director of the new Federal Insurance Office would help make the systemic determination, if the failing financial company is an insurance company or its largest subsidiary is an insurance company, and the FDIC would be consulted.
- Once a systemic determination is made, the FDIC would be appointed the receiver for the failed financial company
- If the financial company to be liquidated is an insurance company, the state regulator is charged with resolving the company under applicable state law. Only if the state regulator does not act within 60 days would the FDIC step in, and even then would act under state law. For registered broker-dealers with Securities Investor Protection Corp. insurance, the new law includes specific provisions governing the coordination of those resolutions between the FDIC and SIPC.
- The law requires systemic nonbank financial companies and large bank holding companies (those with at least $50 billion in assets) to submit to the FDIC, Federal Reserve, and Financial Stability Oversight Council a plan for their rapid and orderly resolution in the event of severe financial distress or failure – otherwise known as a “Living Will.” Jointly with the Federal Reserve Board, the FDIC will issue regulations on the development of “living wills” for the systemic nonbank financial companies and large bank holding companies, review the plans when submitted, and decide whether the plans are adequate. If they are not, then the FDIC and Federal Reserve Board can require changes, impose more stringent requirements or restrictions, and ultimately require the firms to sell operations or assets to reduce the risks they pose to the system.
Strengthened Back-Up Authority
- The new law gives the FDIC back-up examination authority for systemic nonbank financial companies and bank holding companies with at least $50 billion in assets if the FDIC Board determines examination is necessary to implement the FDIC’s authority to provide for orderly liquidation of the company.
- This authority may not be used if the company is in generally sound condition;
- The FDIC must first review the company’s resolution plan and available examination reports; and
- The FDIC must coordinate with the Federal Reserve Board to minimize duplicative examinations.
- The law also authorizes the FDIC to bring back-up enforcement actions against depository institution holding companies if the conduct or threatened conduct of a depository institution holding company poses a foreseeable and material risk of loss to the Deposit Insurance Fund.
Deposit Insurance Fund
- The new law makes positive changes in the FDIC’s authorities to manage the Deposit Insurance Fund in order to have increased resources on hand in the future. It also makes permanent the increase in deposit insurance to $250,000, and makes the increase retroactive to January 1, 2008. It extends the Transaction Account Guarantee program for 2 years from December 31, 2010 to the end of 2012.
What different types of companies will the FDIC now have the power to resolve?
The FDIC will now have the authority to resolve financial companies whose failure would pose a systemic risk to the financial stability of the United States. These companies include bank holding companies and nonbank financial companies such as securities brokers and dealers, and hedge funds. To resolve brokers and dealers, the FDIC would coordinate its efforts with the Securities Investor Protection Corporation (“SIPC”). Where insurance companies are concerned, the company would be resolved under state law, but the FDIC would step in to handle that resolution if the appropriate state authority did not take the necessary action.
Is the FDIC prepared to handle its new responsibilities?
- The FDIC is keenly aware that having a credible systemic resolution authority in place and being ready to act is critical to promoting financial stability and ending too big to fail. If another financial crisis occurs, we will be ready to put our systemic resolution authority to work as Congress intended. We are working rapidly and systematically to implement our new systemic resolution and supervisory responsibilities.
- The FDIC also will:
- actively participate as a member of the Financial Stability Oversight Council;
- take on staff and responsibilities from the OTS in connection with our new supervisory responsibilities for state chartered thrifts;
- write or update key rules and regulations;
- prepare or contribute to several studies; and
- coordinate much of this effort with other financial regulatory
What are some of the rules the FDIC will be involved in writing?
- Some of the most significant relate to:
- the new living wills requirement;
- implementation of Senator Collins’ capital floor requirement;
- implementation of the orderly liquidation authority;
- implementation of the Volcker rule following the Council study;
- source of strength requirements for bank and thrift holding companies;
- credit risk retention requirements for securitizations.
- We'll also update our deposit insurance coverage and assessment regulations to reflect changes made by the legislation.
- List of studies and reports FDIC will produce
- Consult with the Comptroller General on a GAO study of person-to-person lending;
- Conduct a study of core and brokered deposits to evaluate the effect on the Deposit Insurance Fund and on local economies of redefining core deposits, and report to Congress;
- Conduct a study with the Comptroller of the Currency and submit a report to Congress on employees transferred from OTS;
- Review and report, with the other Federal banking agencies, on the investment activities of insured depository institutions and bank holding companies under current law and agency interpretations;
- Review any regulation that relies upon rating agency assessments of credit-worthiness, remove such references, and report to Congress on the modifications;
- Consult with the Comptroller General on a GAO study of hybrid capital instruments as a component of Tier 1 capital;
- Consult with the Comptroller General on a GAO study of capital requirements for intermediate holding companies of foreign banks; and
- Coordinate with other agencies and the Federal Reserve Board on a study of the effect new risk retention requirements and accounting rules have on asset-backed securities.
How will the Deposit Insurance Fund reserve ratio be affected by the new law? What will it mean for bank assessments?
- The new law has enhanced the ability to manage the Deposit Insurance Fund (DIF). The FDIC has developed a comprehensive, long-range management plan for the DIF designed to achieve moderate, steady assessment rates throughout economic and credit cycles while also maintaining a positive fund balance even during a banking crisis.
- The FDIC adopted a new Restoration Plan to ensure that the reserve ratio reaches 1.35 percent by September 30, 2020, as required by the new law. Because of lower expected losses over the next five years, the FDIC elected to forego the uniform 3 basis point increase in assessment rates that was scheduled to go into effect on January 1, 2011.
- The new law requires that the FDIC offset the effect of increasing the reserve ratio from 1.15 percent to 1.35 percent on small insured depository institutions (those with assets of less than $10 billion). The FDIC anticipates going through notice and comment rulemaking in 2011 to determine how to structure the required offset.
- The FDIC undertook a historical analysis of losses that suggests that a reserve ratio of at least 2 percent increases the chances of maintaining stable assessment rates and a positive fund balance during a crisis. The FDIC has proposed setting the designated reserve ratio at 2 percent, which the FDIC views as a long-term, minimum goal. The FDIC has also proposed: (1) a lower rate schedule when the reserve ratio reaches 1.15 percent, and (2) in lieu of dividends, successively lower rate schedules when the reserve ratio reaches 2 percent and 2.5 percent.
- The new law requires that the FDIC amend its regulations to redefine the deposit insurance assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity.
- Since the new assessment base will be much larger than the current base, the FDIC is proposing to lower assessment rates effective April 1, 2011, which achieves the goal of creating a new assessment system that does not significantly alter total revenue collected from the industry.
What do new capital requirements mean for the stability of the banking industry?
- The new law increases capital requirements for bank holding companies and systemic non-bank financial companies. These requirements will help reduce leverage (the amount of debt these companies hold) and provide a more stable financial system in the future.
- For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital.
- These requirements help ensure that bank holding companies will serve as a source of strength to their subsidiary banks rather than as a source of weakness, as we saw too often during the recent financial crisis.
In general, why is capital so important -- not only to the health of banks but also to strengthening the economy?
- Just like the prudent consumer who puts money away for a rainy day, so too must the prudent banker. Capital is the cash a company has on hand -- the equivalent of a household’s savings account. It lends essential stability to individual institutions and to our banking system as a whole.
- Well-capitalized banks can survive and even prosper in uncertain times, and can serve as the indispensable source of credit for economic recovery.
- The recent financial crisis had its roots in excessive leverage, both on the balance sheet and through off-balance-sheet positions.
- At the margin, equity may be more costly than deposits or debt as a means to fund the bank balance sheet.
- But the costs of inadequate capital – to banks themselves and to our economy – have proven to be much higher.
Will the FDIC lose authority on consumer compliance to the new Consumer Financial Protection Bureau?
- No. In fact, the new Consumer Financial Protection Bureau (CFPB) will complement and bolster the FDIC’s efforts to ensure that consumers are treated fairly when obtaining financial products and services. And the FDIC will continue to need and staff a robust consumer protection and supervision function to meet our consumer protection and safety and soundness missions.
- The FDIC will keep all of its compliance examination and enforcement authority for FDIC-regulated institutions with $10 billion or less of assets (which is the vast majority of banks the FDIC supervises). The CFPB will take on compliance examination and enforcement for FDIC-supervised banks that are larger than $10 billion in assets and a number of significant non-bank firms that provide financial products. The FDIC currently supervises 21 banks over $10 billion, plus a total of 24 affiliates, which would move under the CFPB for compliance purposes. However, the FDIC retains back-up enforcement authority for these institutions.
- The law requires the CFPB to coordinate its large bank examination activities with the safety and soundness reviews by the FDIC and the other primary federal regulators.
- The rulemaking authority for consumer financial protection laws (including Truth in Lending, Truth in Savings, Electronic Fund Transfer, HOEPA, etc.) will transfer to the CFPB, mostly from the Federal Reserve Board. An important difference is that, unlike in most Federal Reserve rulemakings today, the CFPB is required to consult with the FDIC and the other prudential regulators when writing these rules.
- Under the new law, the FDIC retains its existing authority in the area of deposit insurance, including the financial education aspects of deposit insurance. In addition, the FDIC and other banking agencies keep their responsibilities for the Community Reinvestment Act and Fair Housing Act.
- The new CFPB is directed to route certain consumer complaints to the appropriate agency for prompt resolution, so the FDIC will continue to handle these complaints.
Will the new law end the funding subsidy for big banks?
- If properly implemented, the reforms should help level the competitive playing field between large and small banks.
- Small institutions rely heavily on deposit funding, and the increase in the deposit insurance limit to $250,000 has already enhanced their competitive position and capacity to lend.
- Ending the idea that some firms are “too big to fail” and arriving at a stronger and more uniform set of capital requirements are the other necessary elements to leveling the playing field. The new law creates the tools, and now it is up to the regulators to put them into practice.
Will these new tools really help prevent, or at least mitigate, a future crisis?
- No set of laws, no matter how enlightened, can forestall the emergence of some new financial crisis somewhere down the road. It is part of the nature of financial markets, observed throughout history.
- However, this law will help limit the ability of financial institutions to take risks that put our economy at risk, and will give regulators the tools to contain the fallout from financial failures so that we will not have to resort to a taxpayer bailout during the next period of financial distress.
- Properly implemented, these measures will require financial institutions to bear more of the risks that they impose on the financial system, and leave taxpayers and more responsible institutions bearing less of the risk.
Will the new regulations stifle lending?
- There is no question that lending has been very sluggish thus far in the financial cleanup, which is posing problems for households and businesses as they are trying to get back on their feet.
- Our goal going forward should be to strengthen financial practices at every stage of the business cycle, which would go a long way toward making financial regulation less pro-cyclical in the future.
- Strengthening financial practices will result in stronger financial institutions that can be a more consistent, prudent, and stable source of lending for our economy.