Activities Related to Systemically Important Financial Institutions
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Risk Monitoring Activities for Systemically Important Financial Institutions
The Dodd-Frank Act expanded the FDIC’s responsibilities for overseeing and monitoring the largest, most complex banking organizations and large systemically important financial institutions designated by the FSOC for Federal Reserve Board supervision. In 2012, the FDIC’s complex financial institution program activities included ongoing reviews of selected banking organizations with more than $100 billion in assets as well as certain nonbank financial companies. In addition, the FDIC continued to work closely with other federal regulators to gain a better understanding of the risk measurement and management practices of these institutions, and assess the potential risks they pose to financial stability.
Title I Resolution Plans
In 2012, according to the “living will” rules promulgated by the FDIC and Federal Reserve, under Title I of the Dodd-Frank Act, Section 165(d), covered companies with nonbank assets over $250 billion or insured depository institution (IDI) assets over $50 billion, were required to submit plans for a nonsystemic resolution under the bankruptcy code. By July 2012, the FDIC and Board of Governors of the Federal Reserve System received the first set of plans from these companies and began the process of reviewing the plans for completeness and sufficiency. These plans are intended to provide information about each firm’s critical operations and core business lines and to identify key obstacles to an orderly resolution in bankruptcy. The first set of companies filing resolution plans will submit revised plans by July 2013. Covered companies with nonbank assets over $100 billion will submit their first resolution plans by July 2013, and all other covered companies must submit their first resolution plans by December 2013.
Title II Resolution Strategy Development
Title II of the Dodd-Frank Act authorizes the FDIC to resolve certain systemically important bank holding companies and other financial companies (other than IDIs which the FDIC resolves under provisions of the Federal Deposit Insurance Act and insurance companies, which are resolved under applicable state law), if their failure would have serious adverse consequences on U.S. financial stability. During 2012, the FDIC reviewed the characteristics of each domestic company and studied the systemic effects and channels of contagion of previous financial downturns and consulted with external practitioners and experts on key resolution components and options. As a result of these activities, the FDIC developed a baseline conceptual approach that could be used across a spectrum of large financial institutions. Throughout 2012, the FDIC discussed this concept at outreach events with other domestic government agencies, the Systemic Resolution Advisory Committee, industry groups, the academic community, and international financial regulators.
Then-Acting Chairman Gruenberg (center) discusses the FDIC’s progress on implementing the Dodd-Frank Act during a meeting of the Systemic Resolution Advisory Committee. Also pictured are (from left) William H. Donaldson, Chairman, Donaldson Enterprises; Paul A. Volcker, former Chairman of the Board of Governors, Federal Reserve System; John S. Reed, Chairman of the Massachusetts Institute of Technology's Corporation; and Thomas Curry, FDIC Director.
Systemic Resolution Advisory Committee
In 2011, the FDIC Board approved the creation of the Systemic Resolution Advisory Committee. During 2012, the Committee continued to provide important advice to the FDIC regarding systemic resolutions. The Committee advises the FDIC on a variety of issues including the effects on financial stability and economic conditions resulting from the failure of a SIFI, the ways in which specific resolution strategies would affect stakeholders and their customers, the tools available to the FDIC to wind down the operations of a failed organization, and the tools needed to assist in cross-border relations with foreign regulators and governments when a systemic company has international operations. Members of the Committee have a wide range of experience including managing complex firms; administering bankruptcies; and working in the legal system, accounting field, and academia.
Coordinating Interagency Resolution Planning
In 2012, the FDIC conducted events to promote interagency information-sharing and cooperative resolution planning. Coordinating with the other federal regulators, these events covered a variety of topics, including the following:
- QFC Tabletop – focused on issues arising from derivative instruments, and other financial contracts considered as “Qualified Financial Contracts,” held by a hypothetical company subject to resolution under Title II.
- Funding Tabletop – covered the operational implementation of funding a potential global systemically important financial institution (G-SIFI) resolution, subject to Title II of the Dodd-Frank Act.
- Three Keys Tabletop – explored the logistical and practical components involved in making the decision to “turn the keys,” and place a SIFI into a Title II receivership.
- Systemic Risk Committee (SRC) Tabletop on Hedge Funds and Systemic Risk – focused on whether there is sufficient actionable information available to FSOC members to determine the systemic impact associated with the failure of a large derivatives counterparty that is not a G-SIFI, e.g., a large domestic hedge fund.
- Central Counterparty (CCP) Informational Lecture – explained the nature of central counterparties, their primary concerns and rule-based requirements, and potential resolution considerations; this lecture was a prelude to a facilitated discussion on CCPs and Title II.
The FDIC also conducted an interagency simulation “Getting to Title II Implementation” in November 2012 that involved evaluating the required steps and possible alternatives when making a decision to implement a Title II resolution for a failing SIFI. The simulation tested the intra- and inter-agency decision-making process leading up to a Title II resolution, identified issues and resolution alternatives, and improved interagency communication and coordination in the context of Title II.
Financial Stability Oversight Council
The Financial Stability Oversight Council (FSOC) was created by the Dodd-Frank Act in July 2010 to monitor and mitigate systemic risk largely through filling gaps in regulatory oversight. The FSOC is composed of ten voting members, including the FDIC, and five non-voting members.
FSOC responsibilities include the following:
- Identifying risks to financial stability, responding to emerging threats in the system, and promoting market discipline.
- Designating whether a nonbank financial company should be supervised by the Board of Governors of the Federal Reserve System and subject to heightened prudential standards.
- Designating financial market utilities (FMUs) and payment, clearing, or settlement activities that are, or are likely to become, systemically important.
- Facilitating regulatory coordination and information-sharing regarding policy development, rulemaking, supervisory information, and reporting requirements.
- Issuing specialized studies and reports.
- Producing annual financial stability reports and requiring each voting member to submit a signed statement indicating whether the member believes that the FSOC is taking all reasonable actions to mitigate systemic risk.
During 2012, the FSOC issued a final rule on designating nonbank financial companies for supervision by the Board of Governors of the Federal Reserve System and subject to enhanced prudential standards. Additionally, several nonbank financial companies were moved to the advanced stage of review for potential designation as systemically important financial companies. The FSOC also designated eight companies as systemically important FMUs, which may subject them to additional risk management standards. Also during 2012, the FSOC released its second annual report, and reports regarding contingent capital and use of prompt corrective action at credit unions. Moreover, in November 2012, the FSOC published options for money market mutual fund reform for a 60-day comment period, which was extended for 30 days. Generally, at each meeting, the FSOC discusses various risk issues, and in 2012, addressed U.S. fiscal issues, the status of Eurozone economies, mortgage servicing and foreclosure issues, energy prices, reforms in the tri-party repurchase agreement market, the status of the investigation regarding potential manipulation of LIBOR, and implications of Superstorm Sandy, among other items.