Dodd-Frank Resolution Plan Roundtable, 11/4/10
Daniel K. Tarullo
Bank of America
Wells Fargo Securities
NY Fed Res
Juan Yanes Luciani
The key issue raised at the roundtable was the relative costs and benefits of a subsidiarized business structure versus a more integrated structure in terms of operational efficiencies and the ability to move liquidity and capital around in an organization.
In her opening remarks Chairman Bair recognized that there would be a separate resolution mechanism for IDI subsidiaries.
Chairman Bair and the other participants generally agreed that subsidiarization would be the easiest strategy to address a resolution plan.
Santander was the only financial institution represented at the roundtable that relied on a subsidiarized structure. Mr. Luciani noted that this structure was suited to their business plan which is focused on locally based commercial banking.
Much discussion was given to why the type of structure adopted by Santander might not be optimal for other organizations. Chairman Bair noted that the need to have distinct and separately capitalized subsidiaries would create a stronger organization. However, others noted that this could also lead to inefficient use of capital and liquidity.
Bank of America is already working through a resolution planning process as part of its contingency planning process, whereas it was unclear where the other institutions stood in addressing this requirement. Mr. Jones noted that the existence of multiple legal entities within the organization made resolution planning more difficult. Mr. Jones also noted that there needed to be agreement on the form of the resolution plan so that it is consistent and understandable for multiple regulators and minimizes redundant reporting in differing formats.
Mr. Shohet of Citi noted the importance of identifying personnel that would be necessary to carry forward a resolution plan if one is ever needed.
A number of the participants noted the importance of cross-border coordination. In that vein, Chairman Bair and Mike Krimminger discussed the FDIC's cross-border efforts with the Basel Committee Cross Border Resolution Group and the FSB.
Mr. Broderick of Goldman noted that a subsidiarized structure may be feasible, but much less efficient, depending on the organizations business model.
Mr. Zubrow of JPM noted that there are also operational benefits of a more integrated structure such as common technology platforms and common delivery of fundamental services.
Mr. Broderick of Goldman noted that the consolidation of business lines with less correlated risks would tend to reduce risk overall. Without offsetting risk in this manner, individual subsidiaries' business activities would have highly correlated risks, thereby, increasing the prospects of that the subsidiary would face financial stress.
Mr. Golhar of Barclays and Mr. Wong of Morgan Stanley suggested that a change to a subsidiarized structure could create concern in the bond market if inability to shift capital and liquidity affected potential repayment in the event of a resolution. In response, Mike Krimminger noted that Dodd-Frank guarantees that bondholders be treated no worse than they would be treated in bankruptcy.
Kuritzkes of State Street also stressed the need for clear guidance on the requirements for resolution plans. A suggestion was made that there be a mechanism (e.g., a college of regulators) to collectively consider resolution plans.
Chairman Bair noted that these resolution plans would have to be living documents that would be continually updated to address potential risks and challenges in the business environment.