[Senate Hearing 113-29]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 113-29




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                              COMMITTEE ON
                          UNITED STATES SENATE


                             FIRST SESSION




                              MAY 15, 2013


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                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor


 Subcommittee on National Security and International Trade and Finance

                   MARK R. WARNER, Virginia, Chairman

             MARK KIRK, Illinois, Ranking Republican Member

SHERROD BROWN, Ohio                  JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia

                  Milan Dalal, Senior Economic Adviser

           Stephen Keen, Republican Professional Staff Member


                            C O N T E N T S


                        WEDNESDAY, MAY 15, 2013


Opening statement of Chairman Warner.............................     1

Opening statements, comments, or prepared statements of:
    Senator Kirk.................................................     4


James R. Wigand, Director, Office of Complex Financial 
  Institutions, Federal Deposit Insurance Corporation............     5
    Prepared statement...........................................    23
    Responses to written questions of:
        Senator Kirk.............................................    34
Michael S. Gibson, Director, Division of Banking Supervision and 
  Regulation, Board of Governors of the Federal Reserve System...     6
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Kirk.............................................    35
William C. Murden, Director, Office of International Banking and 
  Securities Markets, Department of the Treasury.................     7
    Prepared statement...........................................    31




                        WEDNESDAY, MAY 15, 2013

                                       U.S. Senate,
        Subcommittee on National Security and International
                                         Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:06 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mark R. Warner, Chairman of the 
Subcommittee, presiding.


    Chairman Warner. I call to order this hearing of the 
National Security and International Trade and Finance 
Subcommittee, titled ``Improving Cross-Border Resolution to 
Better Protect Taxpayers and the Economy''. I appreciate 
Senator Kirk's willingness to join me in calling this important 
hearing today.
    I said, Senator Kirk, to the witnesses before you got here 
that I can think of very few issues that have more potential 
dramatic effect upon the international financial standings and 
trying to make sure that we do not see a repeat of the crisis 
that took place back in 2008.
    I also see that since it is a relatively complex issue, we 
have managed to scare away all of our colleagues and the press 
and everyone else. But we are going to pursue what I think is a 
very important issue here.
    I have got an opening statement, and then I will call on my 
friend and colleague Senator Kirk, and then we will get to the 
    Resolving a failing, globally active financial institution 
in real time--and I cannot stress enough the requirement of 
thinking about this in real time--across multiple jurisdictions 
without triggering systemic risk or a Lehman-style domino 
effect remains perhaps the most outstanding concern after the 
passage of Dodd-Frank. I think all of us remember those dark 
days in the fall of 2008 when the collapse of Lehman and the 
bailout of AIG triggered global panic. It froze our capital 
markets and reverberated throughout the economy, causing a 
spike in unemployment not seen since the Great Depression and, 
frankly, a spike in unemployment that we have still not 
recovered from.
    Filing on a Sunday evening, Lehman was put into bankruptcy. 
Anyone observing this process, including the thousands of 
American customers who were still waiting for the access to 
their approximately $50 billion in assets, knows that status 
quo approach of putting that internationally complex 
institution into bankruptcy on a Sunday night was not a model 
we want to see repeated.
    The crisis also demonstrated the critical need for enhanced 
coordination between regulators of our world's largest 
economies. Obviously, Lehman and some of these other 
institutions reflect the fact that these major significant 
financial institutions are not by any means limited in terms of 
their national status.
    In the aftermath of the global crisis, Congress moved to 
overhaul the regulatory structure, updating regulations for the 
21st century economic landscape. Now in Title I and Title II of 
Dodd-Frank, which I was proud to work with my friend Senator 
Corker on, we tried to design a system that would ensure 
taxpayers are protected from losses caused by the failure of 
large global institutions.
    Now, our design--and this was something we spent a lot of 
time on back during those days of debate of Dodd-Frank--was to 
try to ensure that bankruptcy would remain the preferred 
resolution approach, and that is again where we put in part of 
Title I the requirement that the living wills--or funeral 
plans, depending on your perspective--provision, I think it is 
extraordinarily essential. And one of the questions I look 
forward to asking our witnesses today is: Have those plans and 
the process of implementing those living wills, has that met 
our goal of trying to make sure that these large complex 
institutions on the vast majority of cases are prepared and 
organized in a structure that could allow them to go through a 
bankruptcy process?
    But we also recognize that particularly in the event when 
there was a crisis coming with an extraordinarily complex 
institution that could be systemically important not just to 
our economy but to the global economy, that we might need in 
effect a Plan B. And Dodd-Frank offers regulators another 
procedure to put a failing, globally active institution out of 
business via Orderly Liquidation Authority in Title II.
    Now, Congress made clear that these authorities were to be 
used only in instances involving a threat to the financial 
stability of the U.S. economy. Even then, Dodd-Frank laid out 
multiple steps before this liquidation authority could be 
    One was that routine regulators--one route regulators are 
discussing to resolve systemically important financial 
institutions, if they were to use this OLA, or this resolution 
authority, involves a so-called single point of entry which 
would have the FDIC enter a financial institution at the 
holding company level and be able through that top-down 
approach, rather than coming at all the various branches, 
through that top-down approach transfer the good assets, those 
assets that are systemically important to not disrupting the 
overall United States or international economy, allow those 
good assets to be transferred to a new entity while keeping 
equity and some debt in the old entity.
    Now, again, let me be clear, at least in terms of my views, 
and I think Senator Corker's views. We wanted to make sure that 
resolution would be such a dreadful process that no rational 
management team would ever prefer that option, so we ensured 
that if the regulators were forced to use the Title II 
resolution authority, the shareholders would be wiped out, 
culpable senior management fired, and the new entity would be 
recapitalized by converting long-term debt to equity.
    Now, after taking writedowns, creditors of the old entity 
would still have a claim on the new entity, which would 
continue to operate to avoid a Lehman-esque freeze in the 
marketplace, which, again, as we know, proved to be very much 
of a disorderly dissolution. The critical element in this 
process must be accomplished, and let me stress this, without 
exposing taxpayers to liability.
    Now, as the FDIC considers the orderly liquidation process, 
it must coordinate with foreign regulators to efficiently 
implement the wind-down for these financial institutions. In 
December, the FDIC published a joint paper with the Bank of 
England outlining a united approach to resolution, and, again, 
I think it is important for the record to note that in excess 
of 80 percent of American banks' foreign operations are based 
in the U.K. So if we can get the U.K. and the United States on 
the same page, we take a giant step forward in this process.
    Among other things, Bank of England officials stated they 
would be comfortable with allowing the FDIC to resolve an 
American bank's subsidiary operations in London in the event of 
failure. Again, an important good first step.
    This is obviously a huge move forward, which, if properly 
accomplished, will create certainty for the marketplace, and I 
hope this progress can continue with other jurisdictions. I 
look forward to hearing from Treasury as well as other 
witnesses on the progress of this coordination.
    A couple final points. In mid-December, the Federal Reserve 
proposed new rules to govern the operations of foreign banking 
organizations in the United States. Again, we have to think 
about not only American banking operations abroad but those 
large foreign-based operations with their operations here in 
the United States.
    Under the proposed rules, the largest foreign banks would 
be required to create an intermediate holding company, 
essentially creating a structure to how U.S. banks operate 
under a bank holding company, trying to make sure that we can, 
in effect, if we had to do a resolution of a foreign-based 
operation here in the United States, there would be a similar 
structure. Foreign banks in the U.S. would be required to hold 
the same level of capital as American banks, and the foreign 
banks with assets in excess of $50 billion will be required to 
undergo heightened prudential regulations, such as stress 
testing, just as American banks are required to do.
    Another important step would be to ensure that--this would 
be very important, I think, to ensure that those foreign banks, 
should they have to go through resolution, that American 
interests are protected.
    Again, I am eager to hear from our witnesses today about 
how this rule interacts with the broader efforts of the FDIC to 
pursue a single-point-of-entry mechanism and what further 
progress we need to make not only with the U.K. but with our 
other foreign nations.
    This is an issue of enormous importance if we are going to 
avoid the potential disorderly process that we saw in 2008, and 
I look forward to hearing from all of our witnesses today.
    So, with that, I will ask Senator Kirk if he would like to 
make an opening statement.


    Senator Kirk. Thank you, Mr. Chairman. I am thrilled that 
you are convening this hearing, and this is my first appearance 
as a Ranking Member. I believe I am the only Senator who was a 
former employee of the World Bank Group and very much care 
about the issues under the jurisdiction of this Subcommittee. 
And I have pledged to work with you to recall the role of the 
international financial institutions as Washington, DC, 
employers to make sure that that little-known role of 
Washington, DC, as a financial center, where I do not think 
most people realize how many countries' fates are decided in 
the boardrooms of the World Bank and IMF right here in town.
    Chairman Warner. Absolutely. Well, I appreciate that, 
Senator Kirk, and let me assure you that no one brings a better 
appreciation of the interconnectedness of our financial 
institutions than somebody with Senator Kirk's experience, and 
he and I are friends, and we are going to be good partners on 
this Subcommittee. I again look forward to working with you.
    I have a lot of questions. I know Senator Kirk does as 
well, so let us get to the witnesses. Our three witnesses, I 
will introduce each of you, and then we will go down the row.
    Jim Wigand is the Director of FDIC's Office of Complex 
Financial Institutions and overseas contingency planning for 
resolving and the resolution of systemically important 
financial companies. Prior to assuming this position in 
December 2010, Mr. Wigand was Deputy Director for Franchise and 
Asset Marketing Division of Resolutions and Receiverships, 
FDIC, and oversaw the resolution of failing insured financial 
institutions and the sale of their assets. Mr. Wigand, welcome.
    Mr. Michael Gibson is the Director of Banking Supervision 
and Regulation at the Federal Reserve Board. As Division 
Director, he oversees the Fed's Department of Bank Regulatory 
Policy and its supervision of banking organizations. He 
represents the Fed on the Basel Committee on Banking 
Supervision and works closely with officials from U.S. and 
international Government agencies on bank oversight issues. 
Welcome, Mr. Gibson.
    And Mr. William Murden has been the Director of the Office 
of International Banking and Securities Markets at the U.S. 
Department of Treasury since September 1996. He is responsible 
for developing and proposing policies to senior Treasury 
officials on a wide range of international regulatory matters, 
including financial stability and reforms to the international 
financial regulatory system. Mr. Murden has served as a 
negotiator for all six G20 summits. Welcome, Mr. Murden.
    So, with that, I will get our witnesses started. Mr. 
Wigand, you are first up.


    Mr. Wigand. Chairman Warner and Ranking Member Kirk, thank 
you for holding this hearing on the important subject of cross-
border issues involved in the resolution of a systemically 
important financial institution with international subsidiaries 
and affiliates. The hearing is timely, and I appreciate the 
opportunity to update the Subcommittee on the progress we have 
made with our foreign counterparts in addressing many of these 
    The financial crisis that began in late 2007 highlighted 
the complexity of the international structures of many of these 
large, complex financial institutions and the need for 
international cooperation if one of them became financially 
troubled. The Dodd-Frank Act requires the FDIC to coordinate, 
to the maximum extent possible, with the appropriate foreign 
regulatory authorities with respect to the resolution of 
systemically important financial institutions having cross-
border operations, or G-SIFIs.
    The FDIC, working with our foreign colleagues, has made 
substantial progress in one of the most challenging areas of 
the financial reforms adopted in the Dodd-Frank Act. Cross-
border issues presented by the prospect of or the occurrence of 
a G-SIFI failure are complex and difficult. The authorities 
granted to the FDIC under Title I and Title II of the Dodd-
Frank Act provide a statutory framework to address these 
important issues.
    In mid-April, 2013, the FDIC and Board of Governors issued 
guidance to institutions that filed resolution plans under 
Title I of the Act in 2012. The guidance makes clear that, in 
developing their 2013 plans, the institutions must consider and 
address impediments to the resolution in a rapid and orderly 
manner under the Bankruptcy Code, including cross-border 
issues. Firms will need to provide a jurisdiction-by-
jurisdiction analysis of the actions each would need to take in 
a resolution to address ring fencing or other destabilizing 
outcomes, as well as the actions likely to be taken by host 
supervisory and resolution authorities.
    Title II provides a backup authority to place a holding 
company, affiliates of an FDIC-insured depository institution, 
or a nonbank financial company into a public receivership 
process if no viable private sector alternative is available to 
prevent the default of the financial company and a resolution 
through the bankruptcy process would have serious adverse 
effects on financial stability in the United States.
    The FDIC's single-point-of-entry strategy for conducting a 
resolution of a SIFI under Title II would provide for such an 
orderly resolution of one of these entities. Under this 
strategy, shareholders would be wiped out, unsecured debt 
holders would have their claims written down to absorb any 
losses that shareholders cannot cover, and culpable senior 
management would be replaced. At the same time, critical 
operations provided by the financial company would be 
maintained, thereby minimizing disruptions to the financial 
system and the risk of spillover effects. This strategy is 
consistent with the approaches under consideration by a number 
of our foreign counterparts.
    As I detail in my written statement, we are actively 
engaged in bilateral discussions with key jurisdictions that 
cover 27 of the 28 G-SIFIs. For example, the FDIC and the Bank 
of England have been working to develop contingency plans for 
the failure of G-SIFIs that have operations in both the U.S. 
and the U.K. Approximately 70 percent of the foreign-reported 
activity of the eight U.S. SIFIs emanates from the U.K.
    In addition, the FDIC is coordinating closely with 
authorities of the European Union and Switzerland. We also have 
been engaged in discussions with resolution authorities in 
Japan and Hong Kong and have been actively engaged in a number 
of multilateral initiatives on resolution planning.
    Through these efforts, we have made substantial progress in 
establishing mechanisms for the sharing of information and for 
coordination with respect to the resolution of G-SIFIs 
operating in our respective jurisdictions. Bilateral and 
multilateral engagement with our foreign counterparts in 
supervision and resolution is essential as the FDIC develops 
resolution plans for individual U.S.-based G-SIFIs. Cross-
border cooperation and coordination will facilitate the orderly 
resolution of a G-SIFI.
    Thank you again for the opportunity to discuss the FDIC's 
efforts to address the issues regarding the failure of a large, 
complex financial institution with international operations. 
While much work remains to be done, the FDIC is better 
positioned today to address the failure of one of these 
institutions, and we remain committed to the successful 
implementation of this important objective of the Dodd-Frank 
    Chairman Warner. Thank you, Mr. Wigand.
    Mr. Gibson.

                         RESERVE SYSTEM

    Mr. Gibson. Chairman Warner, Ranking Member Kirk, I 
appreciate the opportunity to testify today on cross-border 
resolution. My written testimony discusses the improvements 
that have been made in the last few years in the underlying 
strength and resiliency of the largest U.S. banking firms. I 
would like to focus my oral remarks on what has been and 
remains to be accomplished in facilitating a cross-border 
    Congress and U.S. regulators have made substantial progress 
since the crisis in improving the process for resolving 
systemic financial firms. We saw in the crisis that policy 
makers, when faced with a systemically important firm 
approaching failure, needed an option other than a bailout or a 
disorderly bankruptcy. In response, Congress created the 
Orderly Liquidation Authority, OLA, a statutory mechanism for 
the orderly resolution of a systemic financial firm.
    In many ways, OLA has become a model resolution regime for 
the international community, as shown by the ``Key Attributes 
of Effective Resolution Regimes'' document that was adopted by 
the Financial Stability Board in 2011. Thanks to OLA, the 
United States already meets the core requirements of this new 
global standard for special resolution regimes.
    The Federal Reserve supports the progress made by the FDIC 
in implementing OLA, including in particular by developing a 
single-point-of-entry resolution approach. The single-point-of-
entry approach is now gaining traction in other major 
    The Dodd-Frank Act requires all large bank holding 
companies to develop resolution plans and submit them to 
supervisors. The first wave plans were submitted to the Federal 
Reserve and the FDIC last summer. These plans are useful 
supervisory tools. They have helped the firms find 
opportunities to simplify corporate structures and improve 
management systems in ways that will help the firms be more 
resilient and efficient as well as easier to resolve.
    Internationally, the Federal Reserve has been an active 
participant in the Financial Stability Board's many committees 
and technical working groups focused on cross-border 
resolution. The Federal Reserve has responsibility for 
convening U.S. and foreign prudential supervisors and 
authorities to form crisis management groups for the eight 
globally systemically important banks that are U.S. companies. 
These firm-specific crisis management groups meet regularly and 
work to identify and mitigate cross-border obstacles to an 
orderly resolution of these firms.
    Last year, the Federal Reserve sought public comment on a 
proposal that would generally require foreign banks with a 
large U.S. presence to organize their U.S. subsidiaries under a 
single intermediate holding company. The proposal would 
significantly improve our supervision and regulation of the 
U.S. operations of foreign banks and enhance the ability of the 
United States as a host country regulator to cooperate with a 
firm-wide global resolution of a foreign banking organization 
led by its home country authorities.
    Despite the meaningful progress that is being made 
internationally within the Financial Stability Board and in our 
domestic efforts with the FDIC, we still have more work to do 
to overcome the obstacles to a successful cross-border 
resolution of a systemic financial firm. There are several such 
obstacles, but perhaps the most important is that many other 
countries are still working to adopt a statutory resolution 
regime for their systemically important firms.
    Thank you for your attention, and I am pleased to answer 
any questions you may have.
    Chairman Warner. Mr. Murden.


    Mr. Murden. Chairman Warner, Ranking Member Kirk, Members 
of the Committee, as a civil servant who has been with the 
Treasury Department for over 30 years, it is a distinct 
privilege and honor for me to have the opportunity to testify 
here today. I am also pleased that my children, Robert and 
Mariah, have joined me today and are sitting several rows 
behind me.
    Chairman Warner. I am sorry you only got one Senator, but 
it is an important issue, and we are glad you are here.
    Mr. Murden. Yes. But my children are here I think both to 
see how the topic is of interest to Congress as well as trying 
to figure out what their father does for a living.
    The financial crisis demonstrated that instability can 
result from the failure of global financial institutions. As a 
result, G20 leaders agreed in 2009 to develop frameworks and 
tools to effectively resolve these institutions and turned to 
the Financial Stability Board, or FSB, to oversee this effort.
    The FSB in turn laid out an approach that consisted of the 
three key elements:
    First, a new international standard for resolving both 
global systemically important financial institutions, known as 
G-SIFIs, as well as other financial institutions;
    Second, an assessment process to ensure that countries 
implement the new international standard consistently;
    And, third, a framework to resolve G-SIFIs that includes 
individual crisis management groups, or CMGs.
    The FSB established a Resolution Steering Group, chaired by 
Bank of England, to oversee the development and implementation 
of this framework. I represent the U.S. Treasury on this group 
and am joined by representatives from the Federal Reserve and 
the FDIC.
    Much progress has been made on this framework, and I would 
like now to quickly summarize that.
    One, the Resolution Steering Group developed a new 
international standard, called the ``Key Attributes of 
Effective Resolution Regimes for Financial Institutions'', 
which the G20 leaders endorsed in November 2011. The key 
attributes provide over 100 specific recommendations, including 
resolution authorities and powers, recovery and resolution 
planning, resolution funding, segregation of client assets, 
cross-border cooperation, and information sharing.
    Two, assessment. The IMF and the World Bank, as Senator 
Kirk mentioned earlier, in cooperation with the FSB, have 
launched a pilot project to test the key attributes in two 
jurisdictions. The FSB has recently completed its first peer 
review to measure its members' progress in implementing the key 
attributes. This peer review found that while the United States 
is leading the globe in implementing its resolution regime, 
progress is occurring elsewhere, including in France, Germany, 
the Netherlands, Switzerland, the U.K., and Japan. The European 
Union is also working to finalize its own bank resolution 
regime, which all 27 member States will then have to implement. 
The experience with the recent bank failures in Cyprus has 
refocused attention within Europe on the importance of a 
banking union with an effective resolution framework.
    Three, national authorities have also made important 
progress in enabling the resolution of individual firms. CMGs 
have been established for all 28 G-SIFIs. Each CMG is 
developing recovery and resolution plans for its G-SIFI and is 
negotiating cooperation agreements among the national 
authorities that oversee its institutions' important 
    While much has been accomplished, there is still more to 
do: first, encouraging foreign jurisdictions to implement 
effective resolution frameworks to facilitate cross-border 
resolution; second, finalizing resolution cooperation 
agreements between the key national authorities that are 
relevant for the G-SIFI; and, third, establishing strong lines 
of communication among relevant national authorities.
    So, in conclusion, the financial crisis made clear that the 
failure of large, international financial firms can result in 
systemic damage that crosses national borders. The FSB is 
playing a vital role in bringing domestic and foreign 
regulators together to build the capacity, trust, and 
communication necessary to make possible the effective 
resolution of systemic financial institutions.
    Thank you again for the opportunity to testify before the 
Committee today, and I welcome any questions the Senator and 
Chairman may have. Thank you.
    Chairman Warner. Well, thank you, and I look forward to 
raising questions with all of you, but also perhaps, Mr. 
Murden, some questions that will further elucidate to your kids 
what you do.
    Chairman Warner. Let me just start with you, Mr. Gibson, 
and this is not exactly on topic, but a bit of an editorial 
comment but related. Obviously, one of the things we have to do 
as we think about our American SIFI institutions is the fact 
that those institutions need to have either more capital or 
convertible debt at the holding company level to make sure that 
in the event of a failure, there are appropriate assets there 
to absorb losses and protect taxpayers through a resolution 
process. And if we are going to do the single point of entry 
through the bank holding company, the bank holding company has 
got to have enough assets at that top layer to have that.
    Now, can you give us a little bit of update on how far the 
Fed is coming on formulating those requirements for the bank 
holding company level?
    Mr. Gibson. Sure. We have identified that for the single-
point-of-entry resolution strategy to be effective, there does 
have to be enough debt at the holding company level that could 
be converted into equity and used to recapitalize the company 
after the resolution. So we have discussed the fact that we are 
considering making such a proposal, and right now what we are 
working on is the technical details that would make it a 
specific proposal. Obviously one question is how much would be 
the minimum requirement, and really there the question is how 
much is necessary to really give confidence to the market and 
the foreign regulators as well as domestic regulators that it 
is enough.
    Also, what type of debt, should it be subordinated debt, 
should it be senior debt, should it be explicitly tagged as 
convertible debt? Or should we just identify a complete tranche 
of, say, senior unsecured debt? So these are the parameters 
that we are discussing internally.
    We are also discussing with our foreign counterparts the 
idea that it might make sense for other countries to institute 
a similar requirement. If we are all going to be using the 
single-point-of-entry strategy as one of our preferred 
resolution strategies, then we all have the same need to have 
enough debt at the holding company level. And so we have begun 
those discussions with our international counterparts, and the 
timing of whether we in the U.S. propose something or whether 
we work a little bit more internationally is still a little bit 
uncertain. But that is what we are working on right now.
    Chairman Warner. Well, I would just say that a number of my 
colleagues--and I will be sending you some correspondence on 
this matter as well--continue to believe that for our largest 
institutions they need to have sufficient capital standards, 
perhaps increasing above what has been proposed so far, and 
kind of a cousin to that is this additional debt held at the 
holding company level, again, to help absorb--if we are going 
to use the single point of entry, there has got to be enough 
assets up there to get us through this period until whatever 
succeeding institution or entity can continue. So I will be 
anxious and be watching on how you go forward on that.
    Just again following up with you, Mr. Gibson, but also Mr. 
Murden or Mr. Wigand, you may want to weigh in as well, I think 
it is a--it seems to me a rational approach that you have 
proposed for trying to create for foreign operations kind of a 
U.S. equivalency with this sense of that holding company 
structure with enough, again, debt at the American sub-holding 
company so that American interests can be protected. I guess I 
would have the question for any of the panel, but also Mr. 
Wigand on this: Do you see any potential conflict if the FDIC 
is actually going to be doing the mechanics of the resolution 
with the proposal for the foreign banking operations? And kind 
of a corollary to that is, if we ask our foreign partners to 
put more debt at their American sub-level, you know, I would 
imagine we would also have to be prepared for then our foreign 
parties to require more debt from our American institutions in 
their responsive host countries. So if you could take both of 
those on?
    Mr. Gibson. Sure. So maybe I will start. In what we 
proposed in our foreign bank proposal in December, we proposed 
that foreign banking organizations in the U.S. would have to 
set up an intermediate holding company for their U.S. 
subsidiaries, and we proposed that we would apply the same 
capital requirements that we currently apply to U.S. bank 
holding companies. So it would be equal treatment within the 
    We have not proposed that there would be any extra layer of 
debt for the U.S. intermediate holding company. We have not 
proposed that for the U.S. firms yet either. Currently our 
thinking is the extra layer of debt to facilitate the single 
point of entry would have to be at the top-most level only. So 
depending on how the foreign companies are structured, they may 
not need that extra layer of debt at their U.S. intermediate 
holding company as long as they have enough capital and 
liquidity to meet the requirements that we have proposed.
    Mr. Warner. But are you saying that--does that not 
additional layer of debt have to be inside the American sub at 
some point? Or can it still be left over abroad?
    Mr. Gibson. There are many different ways to do it, but one 
way that we are actively considering is to make sure that as 
long as the foreign regulator has enough debt at their parent 
and as long as we have the assurance that the U.S. operations 
will be protected in a global single-point-of-entry resolution, 
then we might not require it to be in the U.S. as long as we 
have the comfort and cooperation with the foreign regulator. If 
we did not have that, then we might very well need more----
    Mr. Warner. At the American?
    Mr. Gibson. At the American.
    Chairman Warner. And, Mr. Wigand, does that pose any 
conflict or problem for you from the resolution piece?
    Mr. Wigand. No, it does not. We view the Fed's proposal as 
being primarily a supervisory tool which facilitates the 
ability of the Federal Reserve to oversee the operations of 
these companies, which have significant operations outside of 
the U.S. And, accordingly, the ability for the Fed to see 
clearly the interconnections between the U.S. operations and 
the home jurisdiction is facilitated with the ability to 
maintain asset and liquidity domestically. The collateral 
benefit of that is it may, of course, avoid the need for the 
U.S. operation to have to go through a resolution process 
because of the maintenance of adequate capital and liquidity 
within the hosted operations here in the U.S.
    In the event that the parent company has to go into a 
resolution process, the requirements that would be imposed 
under the Fed proposed rule would in many respects facilitate 
the home jurisdiction's ability to conduct a single-point-of-
entry resolution because the capital and liquidity requirements 
of those hosted operations here would already be satisfied. The 
Federal Reserve and another supervisor domestically would not 
need to impose additional requirements during this period of 
    As far as a resolution process goes, to the extent that we 
need to implement any type of domestic resolution proceeding, 
whether that be a bankruptcy process, an FDI Act process, an 
OLA process, a State receivership process, we believe that the 
rule does not negatively impact and may facilitate the ability 
of that authority to actually go through that process.
    Chairman Warner. Well, we have got to be sure that there is 
enough at the foreign holding company level to protect the 
American interest as well so that they are not simply taking 
care of their own respective domestic challenges in a 
preference over American creditors.
    Mr. Wigand. And that is, I believe, what is behind the 
capital and liquidity requirements or net asset maintenance 
requirements specifically associated with the proposal.
    Chairman Warner. And, Mr. Murden, this may be a chance for 
you to weigh in on are there concerns from kind of the Treasury 
standpoint and from your activities with the G20 that there may 
be reciprocal requirements from our--on American institutions 
who have large holdings in foreign nations?
    Mr. Murden. Our perspective on that is that many countries 
in Europe have already implemented stronger capital 
requirements, Switzerland in particular. U.K. has proposals 
that would strengthen capital requirements for all their banks, 
including their subs of U.S. financial institutions. Germany 
has authorities to require additional capital for their foreign 
subs. They have already taken that action in relation to Italy.
    So I think if you look at what Europe has in place, I am 
told by my foreign regulator counterparts in Europe that they 
have decided to impose Basel requirements on broker-dealers, 
whether they are owned by U.S. firms or by European banks or 
stand-alone. So they have the provision already to take 
stronger measures.
    The Financial Stability Board has also endorsed a framework 
proposed by the Basel Committee that would permit host 
countries to impose higher capital requirements on all banks, 
including foreign banks in their jurisdictions.
    Chairman Warner. So there has not been any pushback from 
American institutions saying this is going to require them to 
deposit more debt at their foreign sub-level in a Spain, in an 
Italy, in----
    Mr. Murden. I have not heard that particular complaint from 
U.S. financial institutions.
    Chairman Warner. OK. One of the things I find curious is 
that even before we see the completion of the living wills 
process, which I share, again, some frustration that we are 4 
years after the fact and the process is not completed, and I 
understand it is complex, but that some of our colleagues, 
particularly in the House, are talking about, you know, doing 
away with Title II, doing away with this potential resolution 
authority. And I just am curious whether any of you think 
within the current state of bankruptcy law, whether we would be 
prepared under existing bankruptcy law to resolve any of these 
large institutions without the threat of a Lehman-style freeze-
up with the current status quo. Again, I would be happy to take 
each of your comments.
    Mr. Wigand. Of the companies that have to submit living 
wills and that are subject to the provisions of Title I, the 
vast majority of them actually should be resolvable through 
bankruptcy. However, there is a significant subset of those--
the largest, most complex firms--where bankruptcy poses 
significant obstacles.
    In the 2013 guidance the Federal Reserve Board and the FDIC 
issued to these companies for their resolution plans, we 
specifically are asking the institutions to address how through 
the bankruptcy process these obstacles, or we refer to them as 
``benchmarks,'' can be overcome. Among those issues, obviously 
cross-border, the subject of this hearing today, is a 
significant issue. However, one has to consider, as one 
observed in the Lehman insolvency process, multiple competing 
insolvencies, which are likely to take place in differing 
    We have to consider also the operational and 
interconnectedness challenges within an enterprise as different 
subsidiaries of one of these large, complex institutions will 
be dependent on other affiliates for the provision of services 
or perhaps liquidity.
    Additionally, we have concerns associated with the actions 
of counterparties, the termination of derivatives contracts and 
massive close out and fire sale of collateral that we observed. 
Finally, there is a significant challenge associated with the 
funding and liquidity requirements that one would see in the 
bankruptcy process, as well as might occur in an OLA type of 
resolution. In order to mitigate the fallout or systemic 
consequences arising from the insolvency proceeding, liquidity 
has to be provided so that the critical operations that 
financial firm provided to the financial system can be 
maintained and continuity of services can basically be 
    We are requesting these firms to address these issues 
specifically, and given the differing business models that we 
observe with these companies--and we have universal banks, for 
example, we have broker-dealers, we have processing banks. Each 
one of these firms is going to have to take a look at these 
issues and address them in a manner that makes a credible 
argument that bankruptcy can be applied to an insolvency 
process--and which does not result in the type of negative 
consequences to the financial system that we observed with 
Lehman. Those particular impediments we are using as benchmarks 
to make that type of assessment, at the end of the day has to 
be an institution-by-institution analysis.
    Mr. Gibson. I think the premise of your question in 
focusing on existing bankruptcy laws means that my answer has 
to be, as I said in my statement, that we need a choice between 
existing bankruptcy laws and bailout, which the OLA provides. 
That does not mean that the changes we are pushing the firms to 
make through the living will process to improve their ability 
to be resolved, those changes, many of them will make them more 
resolvable under bankruptcy as well can be stabilized under 
Title II OLA. I still think there will be a need for a backstop 
of the OLA in those perhaps unforeseeable circumstances in the 
future where, even if we might expand the range of 
circumstances where bankruptcy is a viable option, there can 
always be a more severe crisis or a more severe situation where 
having that backstop of OLA will be an important option.
    Chairman Warner. Mr. Murden.
    Mr. Murden. From an international perspective, I think I 
would like to say that when the Resolution Steering Group 
started developing the key attributes, working on those in the 
fall of 2010, there was considerable interest in Title II OLA 
and how that process worked. There was a lot of discussion with 
the Chairman of--the Bank of England Chairman and other 
countries on that group. And so they were very interested in 
adopting the key features of Title II OLA into the key 
attributes. So if you look at the key attributes today, there 
are many features that are similar that align with OLA. So the 
U.S. in that sense is leading from a position of strength in 
developing Title II OLA and is setting a model for other 
countries in the development of their resolution framework.
    Chairman Warner. So it is safe to say, Mr. Murden, that if 
we look at our partner nations around the world who have also 
extraordinarily complex financial institutions, they are going 
the route as well of saying let us look at what we have done in 
Title II, use that as a model, not saying let us reject that 
and go to simply a bankruptcy-only process in their respective 
countries. Is that correct?
    Mr. Murden. That is right. I think that I would say they 
have adopted the notion that they need to have a special 
resolution regime for banks and are working to try to implement 
the key attributes in their countries along those lines.
    Chairman Warner. And, again, while we want to get 
bankruptcy as far down the path as possible, we want to 
simplify these firms as much as possible to get them bankruptcy 
suitable. You know, I think we have all--or at least I believe, 
and I guess I would ask each of you, that by the nature of a 
designation of a SIFI, you are talking about something that is 
an institution that may have component parts that are important 
enough to the overall financial system that some component part 
needs to continue, and if it needs to continue, you need to 
have some ability to both have the funding to have that 
continued, and even should you ever have to call upon--again, 
we hope never to be the case--some funding, that funding is 
then replenished not from the taxpayer but from the other SIFI 
firms. Is that not correct?
    Mr. Wigand. That is correct, and I need to be clear--the 
expectation of the FDIC is that in using the single-point-of-
entry process and the creation of a bridge financial company, 
which is well capitalized due to having an adequate amount of 
unsecured debt which would provide market confidence, that the 
ongoing operations that come out of this process would be 
viable. The use of the liquidity facility that is provided for 
the in the Dodd-Frank Act, the Orderly Liquidation Fund, would 
really only be a backstop. Our expectation is that the bridge 
financial company will borrow in the private market. It may 
have to pay a premium to do that, but that would be our 
expectation. The private markets would be a source of liquidity 
as well as to the extent that customary sources of liquidity 
were provided to the financial firm, those would be available 
as well. Only in the event of private sources and customary 
sources not being available to the bridge financial company 
would we then go to the Orderly Liquidation Fund as a source of 
liquidity to ensure the continuity of those critical operations 
to the financial system. Given the authority of the statute, we 
believe that just the issuance of guarantees probably would be 
sufficient, so then the bridge financial company could issue 
guaranteed debt which would be guaranteed by the OLF, or 
Orderly Liquidation Fund, similar to the debt guarantee program 
that was observed back in 2008 and 2009, where financial 
companies issued debt that was guaranteed by the FDIC, but the 
market was very receptive to purchasing that type of debt. We 
believe that that would be also a preferable recourse to direct 
borrowing from the OLF.
    Chairman Warner. Right. Which again, just to reiterate, 
that only comes to pass after shareholders are wiped out, after 
management is expunged, after, you know, long-term debt and 
unsecured creditors may be converted, and then, in effect, the 
remaining assets are borrowed against with a backstop 
guarantee; but, you know, to me that does not sound like a 
    Mr. Wigand. We would also ensure that any type of OLF 
borrowing is fully secured. Our expectation would be, as the 
law requires, any OLF borrowing is fully repaid from the assets 
of the firm, and there would be an overcollateralization 
requirement with that borrowing. In the highly unlikely event 
that the collateral was insufficient, then you go to the 
assessment of the industry. But at no one time would taxpayers 
be at risk.
    It is also important, as you noted, Chairman Warner, that 
this is a liquidity facility. It is strictly for the provision 
of liquidity. It is not for the provision of capital support. 
It is not to enhance the position of any former creditors of 
the failed institution. It is strictly a liquidity facility 
that we would expect to use as a backstop to private sector or 
customary sources.
    Chairman Warner. A liquidity event to keep those--not the 
whole institution, but that is simply that critical component 
of that institution that is critical to the overall financial 
system. I really do wish that more of my colleagues and maybe 
some of my House colleagues could hear this presentation. Maybe 
we could encourage them to hold a similar hearing because I 
think it might clear up some of the misunderstanding that I 
understand even was this morning a subject of a hearing on the 
other side of the body.
    Does anybody want to add anything else on that subject? Mr. 
    Mr. Gibson. The only thing I would add is that we can work 
to make firms more resolvable under bankruptcy, but we can 
never foretell what the macroeconomic or financial sector 
conditions are going to be at the time one of these firms gets 
into trouble. So bankruptcy might be a good option for Firm A 
if financial markets are relatively calm, but we might need the 
extra assurance of the OLA process with the FDIC overseeing 
that if financial conditions are really disorderly.
    Mr. Wigand. To reiterate a point Mike is making, it is 
important to avoid the two choices that the Government had in 
2008 of--a disorderly resolution process through--for example, 
a bankruptcy framework, or bailing out companies. Those two 
very negative----
    Chairman Warner. Bad and badder.
    Mr. Wigand. ----choices really should never be a situation 
in which policy makers find themselves again. Having a backstop 
option to a bankruptcy process such as OLA is important so that 
market discipline can be imposed onto the stakeholders of the 
firm and certainly OLA provides through its authority and, more 
importantly, through the strategic approach we have adopted at 
the FDIC, a single point-of-entry, where the shareholders and 
creditors of the firm that are at the top holding company 
level, that elect the board of directors, that appoint the 
management, that have allowed the firm to operate in the way it 
does, they bear the first consequences of those actions through 
the loss absorption and the writedowns that they are going to 
have to take. Culpable management, of course, is held 
accountable. The law specifically requires that culpable 
management cannot be retained. In addition to that, we are 
actually going one step further and looking at not only what 
would be deemed culpable management in terms of the law, but 
also what is necessary to move the company forward, or its 
parts forward, in a manner such that the market is confident 
that whatever comes out of this process as a going operation--
and there might be multiple operations that come out of this 
process. We should not just think of this as a single company 
that emerges. There might be several----
    Chairman Warner. It sure as heck would not be the single--
what comes out at the other end would not be the entity that 
goes in on the front----
    Mr. Wigand. Correct, absolutely.
    Chairman Warner. This is the roach motel analogy we 
continue to use. You may check in, but whatever is checking out 
is not the same institution.
    Mr. Wigand. It will be a different company or companies 
that come out of this process.
    Chairman Warner. Companies, with different chances or 
different sets of shareholders, different sets of management.
    Mr. Wigand. Correct. The market has to be comfortable that 
whoever is in control or operating those entities will 
basically be able to move forward and did not cause the 
    Chairman Warner. And the preface to all this, again, of 
course, will be--I am going to come to this. It is great not 
having any other Members here. I get to ask all my questions, 
which is that we are going to have a living will process set up 
so that those institutions that were so complex that the--
again, our preference is bankruptcy, but that in the last 
crisis, bankruptcy just was not able to be used. If we do our 
job well on the front end with the living will process, the 
more rational choice for any entity will be to go through an 
orderly bankruptcy process. Our hope would be.
    Mr. Wigand. We believe that is the case, that there are 
actually incentives associated with the bankruptcy process as 
compared to OLA, one actually being the provision or provisions 
associated with management that would incent a company to go 
forward with a bankruptcy process prior to the need for the 
Government to recognize the OLA as basically a backstop or last 
resort alternative.
    Chairman Warner. Well, one of the--let us get to kind of 
drilling down to the next level. One of the things we saw with 
Lehman, and obviously with AIG as well, was the challenge. Last 
time, when we get into derivatives of counterparties, basically 
in the event of a collapse, taking that collateral and heading 
for the hills, you know, one of the things we put in Dodd-
Frank--and I would be curious about each of your reactions to 
this. And this was a best effort. I am not sure it was the 
perfect solution set, but we put that 24-hour stay so that 
there would be some ability to assess things so that we do not 
have this enormous crisis and flight of collateral.
    Right number, you know, less longer, right approach, 
comments? And, again, anybody on----
    Mr. Wigand. I will stay on this. The 24-hour stay provision 
is a very important one and mirrors a similar provision under 
the FDI Act that we have had for depository institutions. Under 
our single point-of-entry approach, the holding company goes 
into the resolution process, and the operating subsidiaries, 
where the vast majority of these contracts reside, of course, 
maintain their honoring of those contracts because the 
subsidiaries remain as going concerns. Where this becomes an 
important issue is if the holding company acted as either a 
guarantor for those contracts--and there is a default provision 
upon an insolvency process for a guarantor--or if the contract 
has a cross-default provision, so that even though the direct 
counterparty does not go into an insolvency process, it is 
cross-defaulted to any affiliate of that party or parent if it 
goes into an insolvency process. That is where the provision 
comes into utility because we would anticipate that these 
operating companies would be moved essentially into this bridge 
financial holding company as part of the overall strategy.
    Of course, the law only goes as far as our borders. It does 
not apply internationally. We have to look at the types of 
contracts that are originated extraterritorially as to whether 
or not they reference U.S. law. If they do not, what would the 
financial incentives be for those counterparties to exercise 
any type of acceleration and termination provisions on those 
    That is a problem for us. It is a problem for any other 
jurisdiction as well that is looking at resolving systemically 
important companies that go across borders.
    An international effort would serve the global financial 
community well in this regard. A change to the standard form 
contract would help if a similar type of provision, such as a 
24-hour stay, were adopted so that all financial companies, 
whether domestic or foreign, had a provision similar to what we 
observe in Dodd-Frank that would allow basically for the 
assumption of these contracts by a creditworthy counterparty 
and avoid immediate termination or acceleration of them.
    Chairman Warner. Mr. Gibson and Mr. Murden, do you want to 
comment on that? Because I know as well there are some concerns 
being raised now from some of our foreign friends, the 
potential reach of Dodd-Frank around this issue and around 
derivatives, and I would like to get your comments.
    Mr. Murden. Yeah, I can comment on internationally, this is 
an important issue, and in the Resolution Steering Group as we 
were discussing the key attributes, there was a lot of interest 
from the Bank of England Chair and other members in the Dodd-
Frank provision, and so there is a temporary stay, is one of 
the key attributes that countries have committed to implement.
    The European Commission has drafted----
    Chairman Warner. And is there a sense that the 24-hour is 
the right amount of time? Is that the general----
    Mr. Murden. They use the same provision from Dodd-Frank, so 
that is--24 hours is what the consensus was in that group. And, 
accordingly, when the European Commission drafted their 
Recovery and Resolution Directive, which is their 
implementation of a resolution framework, they do have that 
provision in there. We are monitoring the various stages of 
that directive as it goes through its legislative process, but 
it is currently--I am told it is currently adequate in terms of 
giving it the temporary stay.
    Chairman Warner. Mr. Gibson.
    Mr. Gibson. You are definitely right to identify 
derivatives as one of the challenges for cross-border 
resolution being effective, and we do have a multifaceted 
approach to reducing derivatives risk in our financial reform 
program. We are requiring that all standardized derivative 
contracts be cleared through a central counterparty, and that 
uncleared derivative contracts have margin requirements so that 
there is some collateral there. Those are both part of the G20 
financial reform program, and we expect that those will be 
implemented worldwide. So that will reduce the scope of the 
problem of derivatives, although there will still be some 
    And as Jim mentioned, there are a couple different 
approaches that we are pursuing internationally on the cross-
border derivatives issues. I would broadly characterize those 
as changing law or changing the contracts. Changing the law 
means getting the stay that you cited that we have in our U.S. 
law, the 24-hour stay, getting that in the foreign resolution 
regimes that are currently being introduced, and have some 
mutual recognition, so one country's regime could create a stay 
globally for that country's failing institution.
    The other is change the contract so these cross-default or 
guarantee from the holding company aspects of the contracts are 
not there, and then the automatic triggers on the derivatives 
will not automatically happen.
    Right now we are pursuing both strategies, and there is 
still some work to do to make that effective.
    Chairman Warner. Well, I guess one of the questions I have 
as well, you know, it sounds like we are proceeding apace. 
Again, many of us, recognizing the complexity in the variety of 
jurisdictions--since we cannot even get all of domestic Dodd-
Frank regulations out 4 years later, I understand that it is 
more complex. And it seems--and correct me if I am wrong--that 
the consensus testimony is, you know, great progress made with 
the U.K., which, again, takes care of--and I think you said, 
Mr. Wigand, my number may have been wrong at 80 percent. It may 
have been more like 70 percent of American-based foreign 
banking operations in the U.K. And, Mr. Murden, you said other 
areas are moving forward both on resolution authority, they are 
modeling themselves after our Title II, not a bankruptcy-only 
process, growing recognition around this issue of derivatives, 
which I still have enormous concerns about. But how vulnerable 
are we or how vulnerable is the international financial system 
in this interim period before our worldwide colleagues get 
their resolution authority, get their processes in place?
    Mr. Gibson. We have made a lot of progress not only in 
having the Title II Orderly Liquidation Authority and the many 
steps the FDIC has already taken to build that out, but we have 
a stronger financial system, more capital in our banks, banks 
    Chairman Warner. More capital in our banks and hopefully 
the Fed even moving further on that shortly.
    Mr. Gibson. Strengthening the capital in the banks to make 
the likelihood of a need for resolution more remote is an 
important part of what we have done, and that is where we are 
right now. We still have work to do before we are going to be 
comfortable, but we have made a lot of progress.
    Chairman Warner. I am not sure that was an answer about how 
vulnerable--but, still, the question of--I understand the 
progress we have made, but are we vulnerable from a foreign 
institution? There are large foreign institutions, European 
banks that may not have been as well as perhaps our Swiss 
friends or our British friends who, you know, could have 
enormous challenges, that are internationally significant if 
there is not a resolution authority. How high on our alert--I 
do not want us to go back to the homeland security red, yellow, 
orange, whatever the other color codes are, but how concerned 
should we be as policy makers about the fact that we are still 
in this interim period?
    Mr. Wigand. I would say domestically we have made 
significant progress with respect to thinking through how we 
would use the statutory authority we were granted under Dodd-
Frank as well as, as Mike indicated, lowering the probability 
that domestic companies would ever need to be resolved under 
that authority. By increased capital requirements, to think of 
Dodd-Frank is that it has provisions that lower the probability 
that a company would fail and then it also has provisions that 
lower the cost to the financial system upon that failure. 
Significant progress has been made domestically on both of 
those fronts, although there is certainly more work to do.
    On the international front, I would characterize the shift 
in the dialogue regarding resolving systemically important 
financial companies, whether they are domestic or foreign 
jurisdiction is the home jurisdiction for the company, as one 
which has markedly shifted from what it was prior to the crisis 
to what it is today. Rarely does a week go by in which I do not 
have contacts with foreign counterparts, either on a 
supervisory side or resolution authority side, with not just 
one or two but maybe even three or four foreign supervisors 
and/or resolution authorities. And that type of dialogue and 
discussion just did not occur prior to this financial crisis, 
and those on a bilateral basis. But as Bill indicated, there 
are quite a few multilateral initiatives which have also 
improved the dialogue and discussion around this point.
    There is a lot of work to be done, but I would also 
characterize it as the progress has been rather significant 
from where we were back in 2008.
    Chairman Warner. Mr. Murden, and you may--I would like you 
to specifically address whether the recent challenges in Cyprus 
has kind of a little more urgency to this.
    Mr. Murden. Right, right. So just first to build off what 
Jim said, you know, we are better placed than we were in 2007, 
2008, and I think the fact that all 28 G-SIFIs have a crisis 
management group now, and when the regulators now know each 
other, know who they are, so if a major financial--one of these 
G-SIBs got into trouble tomorrow, you know the foreign 
regulators account for the bulk of that financial institution--
    Chairman Warner. But can I interrupt just for a second?
    Mr. Murden. Yes.
    Chairman Warner. I appreciate what you are saying, but if 
one of these G-SIBs were in a country that did not have a 
resolution authority, you would know who to call.
    Mr. Murden. Right.
    Chairman Warner. But would your counterparty in the other 
country have a process to know how to resolve or deal with the 
    Mr. Murden. So these 28 G-SIFIs, they are from 10 
countries. Altogether 16 of them are from Europe and 8 from the 
United States, 4 from Asia. All of those countries, with the 
exception of China, have some type of resolution framework in 
place. It may not be ideal. In the case of the U.K., for 
instance, they passed theirs in 2009 and it does not apply to 
nonbanks. Japan is passing theirs, but they have something to 
address banks.
    So in terms of the 28 G-SIBs that are covered, it may not 
be elegant, but we are covered in that respect in terms of 
knowing how to resolve it and knowing who your counterparts 
    In other countries, in Cyprus, for instance, which does not 
have any G-SIBs, but it did have banks that were very important 
systemically--in fact, Cyprus shows--one of the lessons from 
that shows what happens when banks become too large. The Cyprus 
banking system was six times the size of GDP. And it also shows 
how the structure of banks' liabilities can matter. They had 
very little sub debt, very little unsecured credit in terms of 
bailing in. So they ended up initially haircutting insured 
depositors, which caused panic and runs and capital controls.
    And so I think that has rekindled interest in Europe on why 
an orderly resolution framework is important, and the finance 
ministers in Europe met just yesterday to make progress on an 
orderly resolution framework on their Resolution and Recovery 
    Chairman Warner. Are there any benchmark timelines we 
should look to?
    Mr. Murden. So I would look to the--June 20th is another 
meeting of the finance ministers working on the Recovery and 
Resolution Directive. The European legislative process is very 
complicated. I do not pretend to be an expert. It actually 
involves three different groups, not two, as the United States. 
It involves the European Commission, the European Parliament, 
and the European Council of Ministers.
    Chairman Warner. It may be the only process that makes the 
U.S. Congress looks speedy.
    Mr. Murden. That is right. That is right. And so they are--
modifications to this legislation have to be resolved in 
something called the ``trilogue,'' but we expect it to be 
approved sometime this summer. There is great urgency in Europe 
to get this in place. This would only be phase one. This would 
require the 27 member States to adopt legislation in their own 
countries, and it would create 27 resolution authorities.
    I think phase two, as Europe embarks on this banking union, 
and by summer 2014 has a single supervisor of their large 
banks, being the European Central Bank, I think they are 
working right now to try to figure out how to move toward a 
single European resolution mechanism to make that process more 
    Chairman Warner. I really appreciate it. I have only got 
one more question, and it is going to be more for Mr. Wigand 
and Mr. Gibson. But we have spent a lot of time about 
resolution. We have spent a lot of time about challenges cross-
border. I do think the notion and the progress made on single 
point of entry seems to be a logical, rational approach, and it 
does seem like we are trying to make sure at that holding 
level, bank holding company level, there is going to be an 
appropriate asset base to get us through this process.
    But we all know, you know, if we get another part of Dodd-
Frank fully right, the chances of this will be even further 
diminished, and that is, using the enormous power that we 
granted the FDIC and the Fed in using these living will 
documents to make sure that these institutions are not too big 
to fail or too big to be put out business in a nonsystemically 
important way. And I know on April 15th, the FDIC and the Fed 
published the kind of next iteration, editorial comment, and 
question, you know, there were many of our colleagues on both 
sides of the aisle who wanted to come into these institutions 
and purely on the virtue of size put an asset cap or other 
tools. I think the majority of us felt that the better way to 
try to put a price on size in terms of added capital and 
liquidity requirements, but also a much greater transparency on 
these institutions so that we could see the enormous 
interconnectedness of some of these institutions and how they 
would go through some process of being wound down that would 
not destroy or harm our financial institutions or our overall 
    You know, I am personally hopeful that you will use those 
tools somewhat aggressively and demonstrate that both from a 
transparency standpoint and if there are examples where these 
institutions cannot be wound down appropriately through 
bankruptcy, that, you know, Title I gives you a lot of tools 
around these living wills. And I just would like to hear from 
both you gentlemen about, one, what you hope to see out of this 
next round of--I know you have got, I believe, five specific 
requirements you asked when we are going to get responses. When 
will we have this living wills process finished?
    Mr. Wigand. We certainly take this exercise very seriously, 
and authority that the Congress gave the FDIC and the Fed 
reviewing these living wills, the resolution plans, funeral 
plans, and the provisions for consequences of finding these 
plans deficient and not having plans which would indicate that 
the company is resolvable in an orderly rapid manner through 
the bankruptcy process. As you noted, Chairman Warner, that we 
received the first set of plans in 2012, and that was what I 
characterized as a learning experience for both the firms as 
well as the FDIC and the Fed.
    As a result of those submissions, we came out with our 2013 
guidance, which really sets forth some key benchmarks, 
difficult benchmarks, for these companies to address. These 
benchmarks would be applied to their specific business model, 
whether it be a universal bank, a broker-dealer model, or a 
processing bank.
    These are the key obstacles that would be presented in the 
bankruptcy process. Our expectation is that progress will be 
made, that the firms will take the guidance seriously and 
provide a robust analysis addressing these issues. If they do 
not, then the law provides provisions for the FDIC and the 
Federal Reserve Board to impose upon the companies to either 
minimize the prospect of--if the plans are found deficient, to 
either minimize the prospect of their failure through 
additional capital or liquidity requirements, or in the event 
that the companies still fail to produce a credible plan, 
ultimately divestiture of some of the business operations. That 
would occur after the statutory 2-year requirement.
    It remains to be seen the amount of progress the firms will 
demonstrate in their plan submissions from 2012 to 2013, but 
our expectation is that those key benchmarks need to be 
addressed, and if they are not----
    Chairman Warner. This year.
    Mr. Wigand. This year, and then if the--the FDIC is 
certainly prepared--the FDIC Board is prepared to look at its 
authorities for remediating those.
    Mr. Gibson. I think what a successful living will process 
would look like would be that, as we saw from 2012 to 2013--
2012 was the first year the firms had submitted any plan, so 
there was, as Jim said, a lot of learning both by the firms and 
by the regulators as to how that was working.
    The guidance that we put out for the 2013 plans did have 
those five pretty significant things that we wanted the firms 
to do differently in this year's plans compared with last 
year's plans, obstacles to address, things where we felt like 
there was more work needed.
    I think success would look like those changes from year to 
year start to shrink until really the plan is an effective plan 
for resolution under bankruptcy and we do not have to come in 
with big changes from 1 year to the next, but actually we feel 
like that we are comfortable with the plan. We should observe 
the changes from 1 year to the next being smaller, with the 
obvious exception of if a firm goes through a merger or 
significant divestiture, then we would require them to revise 
their plan to take account of that.
    Chairman Warner. Well, I would just simply say that I think 
progress has been made. I think this hearing has helped me in 
terms of also some sense of how we are doing vis-a-vis the rest 
of the world. I think it has also helped in terms of showing 
that the rest of the world is actually taking the model that we 
put forward in Dodd-Frank. I think particularly Mr. Wigand has 
laid out I think with some additional clarity how the 
resolution process, again, would not be the choice of any 
rational management team, that there is not a taxpayer 
liability, that there is a potential, in effect, credit 
enhancement to keep liquidity of that components of the firm 
that are systemically important. I think that is all important 
and helpful to me. Mr. Murden, I hope you have done a good job 
with your kids as well in terms of afterwards. But the only 
caution--and I say this as someone who knows, again, 
recognizing that our--I think everyone, regardless of what they 
feel about Dodd-Frank, which acknowledge that our financial 
institutions look much better than the rest of the world's 
post-crisis, and consequently we are stronger for that.
    But, you know, we are 4 years after the fact, and it seems 
like we do not go 6 months without another crisis/scandal 
coming out of the banking industry and a growing concern from a 
great number of members from both sides of the aisle that, you 
know, this process is not moving fast enough or has not had 
enough teeth in it that we do not have both a stronger system, 
a less concentration--or that we have increased concentration, 
that we have continued concerns about the basic fairness of our 
system. And I cannot urge you both enough--and I think I 
understand to some degree at least the level of complexity of 
going through this, but I would urge you all due speed, because 
my fear would be for all the good work that has been done, we 
could be one scandal away from rash action that might look good 
politically but might not end up making both a stronger system, 
a more transparent system, and a system that would continue to 
allow not just the American economy but the world economy to 
continue on its recovery.
    But I thank all of the witnesses for very good testimony. 
Again, I wish more of my other colleagues were here. I do hope 
that we will share this with these colleagues, and some of our 
colleagues in the House who think a current bankruptcy system 
only might somehow solve the problem, I just fail to understand 
    And, with that, I thank you again, all the witnesses. The 
hearing is adjourned.
    [Whereupon, at 3:25 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
  Director, Office of Complex Financial Institutions, Federal Deposit 
                         Insurance Corporation
                              May 15, 2013
    Chairman Warner, Ranking Member Kirk, and Members of the 
Subcommittee, I appreciate the opportunity to testify on behalf of the 
Federal Deposit Insurance Corporation (FDIC) regarding our progress in 
addressing cross-border issues involved in the resolution of a 
systemically important financial institution (SIFI) with international 
subsidiaries and affiliates.
    The financial crisis that began in late 2007 highlighted the 
complexity of the international structures of many of these large, 
complex financial institutions and the need for international 
cooperation if one of them became financially troubled. The Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 
requires the FDIC to coordinate, to the maximum extent possible, with 
the appropriate foreign regulatory authorities with respect to the 
resolution of SIFIs having cross-border operations.
    Title I and Title II of the Dodd-Frank Act provide significant new 
authorities to the FDIC and other regulators to address the failure of 
a SIFI. All large, systemic financial companies covered under Title I 
must prepare resolution plans, or ``living wills,'' to demonstrate how 
the company would be resolved in a rapid and orderly manner under the 
Bankruptcy Code in the event of the company's material financial 
distress or failure. Requiring SIFIs to explain their interactions with 
foreign authorities during a resolution is a key element of the plans.
    While bankruptcy remains the preferred option, Title II provides a 
back-up authority to place a holding company, affiliates of an FDIC-
insured depository institution, or a nonbank financial company into a 
public receivership process, if no viable private sector alternative is 
available to prevent the default of the financial company and a 
resolution through the bankruptcy process would have serious adverse 
effects on financial stability in the United States. Establishing and 
maintaining strong working relationship with our cross-border 
counterparts will be critical, should the Title II authorities ever 
need to be invoked. The FDIC and other regulators have been actively 
working with our international counterparts to coordinate resolution 
strategies for globally active systemically important financial 
companies (G-SIFIs).
    My testimony will provide greater detail about the authorities 
available to the FDIC to address the failure of a SIFI and how they 
improve our ability to manage such failures on an international basis. 
In addition, it will describe the significant progress we have made 
with our foreign colleagues in one of the most challenging areas of the 
financial reforms adopted since the recent crisis. Although much has 
been accomplished, more work remains.
Resolving a Systemically Important Financial Firm
Title I--``Living Wills''
    Bankruptcy is the preferred resolution framework in the event of a 
SIFI's failure. To make this prospect achievable, Title I of the Dodd-
Frank Act requires that all bank holding companies with total 
consolidated assets of $50 billion or more, and nonbank financial 
companies that the Financial Stability Oversight Council (FSOC) 
determines could pose a threat to the financial stability of the United 
States, prepare resolution plans, or ``living wills,'' to demonstrate 
how the company could be resolved in a rapid and orderly manner under 
the Bankruptcy Code in the event of the company's financial distress or 
failure. This requirement enables both the firm and the firm's 
regulators to understand and address the parts of the business that 
could create systemic consequences in a bankruptcy. The living will 
process is a necessary and significant tool in ensuring that large 
financial institutions can be resolved through the bankruptcy process.
    The FDIC and the Federal Reserve Board issued a joint rule to 
implement Section 165(d) requirements for resolution plans--the 165(d) 
Rule--in November 2011. The plans will detail how each covered company 
could be resolved under the Bankruptcy Code, including information on 
their credit exposures, cross guarantees, organizational structures, 
and a strategic analysis describing the company's plan for rapid and 
orderly resolution.
    In addition to the resolution plan requirements under the Dodd-
Frank Act, the FDIC issued a separate rule which requires all insured 
depository institutions (IDIs) with greater than $50 billion in assets 
to submit resolution plans to the FDIC for their orderly resolution 
through the FDIC's traditional resolution powers under the Federal 
Deposit Insurance Act (FDI Act). This rule, promulgated under the FDI 
Act, complements the joint rule on resolution plans for SIFIs. The 
165(d) Rule and the IDI resolution plan rule are designed to work in 
tandem by covering the full range of business lines, legal entities and 
capital-structure combinations within a large financial firm.
    The FDIC and the Federal Reserve review the 165(d) plans and may 
jointly find that a plan is not credible or would not facilitate an 
orderly resolution under the Bankruptcy Code. If a plan is found to be 
deficient and adequate revisions are not made, the FDIC and the Federal 
Reserve may jointly impose more stringent capital, leverage, or 
liquidity requirements, or restrictions on growth, activities, or 
operations of the company, including its subsidiaries. Ultimately, the 
FDIC and the Federal Reserve, in consultation with the FSOC, can order 
the company to divest assets or operations to facilitate an orderly 
resolution under bankruptcy in the event of failure. A SIFI's plan for 
resolution under bankruptcy also will support the FDIC's planning for 
the exercise of its Title II resolution powers by providing the FDIC 
with a better understanding of each SIFI's structure, complexity, and 
2013 Guidance on Living Wills
    Eleven large, complex financial companies submitted initial 165(d) 
plans in 2012. Following the review of the initial resolution plans, 
the agencies developed instructions for the firms to detail what 
information should be included in their 2013 resolution plan 
submissions. \1\ The agencies identified an initial set of significant 
obstacles to rapid and orderly resolution which covered companies are 
expected to address in the plans, including the actions or steps the 
company has taken or proposes to take to remediate or otherwise 
mitigate each obstacle and a timeline for any proposed actions. The 
agencies extended the filing date to October 1, 2013, to give the firms 
additional time to develop resolution plan submissions that address the 
     \1\ ``Guidance for 2013 165(d) Annual Resolution Plan Submissions 
by Domestic Covered Companies that Submitted Initial Resolution Plans 
in 2012'', http://www.fdic.gov/regulations/reform/domesticguidance.pdf.
    Resolution plans submitted in 2013 will be subject to informational 
completeness reviews and reviews for resolvability under the Bankruptcy 
Code. The agencies established a set of benchmarks for assessing a 
resolution under bankruptcy, including a benchmark for cross-border 
cooperation to minimize the risk of ring-fencing or other precipitous 
actions. Firms will need to provide a jurisdiction-by-jurisdiction 
analysis of the actions each would need to take in a resolution, as 
well as the actions to be taken by host authorities, including 
supervisory and resolution authorities. Other benchmarks expected to be 
addressed in the plans include: the risk of multiple, competing 
insolvency proceedings; the continuity of critical operations--
particularly maintaining access to shared services and payment and 
clearing systems; the potential systemic consequences of counterparty 
actions; and global liquidity and funding with an emphasis on providing 
a detailed understanding of the firm's funding operations and cash 
    As reflected in the Dodd-Frank Act, the preferred option for 
resolution of a large failed financial firm is for the firm to file for 
bankruptcy just as any failed private company would, without putting 
public funds at risk. In certain circumstances, however, resolution 
under the Bankruptcy Code may result in serious adverse effects on 
financial stability in the United States. In such cases, the Orderly 
Liquidation Authority set out in Title II of the Dodd-Frank Act serves 
as the last resort alternative and could be invoked pursuant to the 
statutorily prescribed recommendation, determination, and expedited 
judicial review process.
Title II--Orderly Liquidation Authority
    Prior to the recent crisis, the FDIC's receivership authorities 
were limited to federally insured banks and thrift institutions. The 
lack of authority to place the holding company or affiliates of an 
insured depository institution or any other nonbank financial company 
into an FDIC receivership to avoid systemic consequences severely 
constrained the ability to resolve a SIFI. Orderly Liquidation 
Authority permits the FDIC to resolve a failing nonbank financial 
company in an orderly manner that imposes accountability while 
mitigating systemic risk.
    The FDIC has largely completed the core rulemakings necessary to 
carry out its systemic resolution responsibilities under Title II of 
the Dodd-Frank Act. For example, the FDIC approved a final rule 
implementing the Orderly Liquidation Authority that addressed, among 
other things, the priority of claims and the treatment of similarly 
situated creditors.
    Key findings and recommendations must be made before the Orderly 
Liquidation Authority can be considered as an option. These include a 
determination that the financial company is in default or danger of 
default, that failure of the financial company and its resolution under 
applicable Federal or State law, including bankruptcy, would have 
serious adverse effects on financial stability in the United States and 
that no viable private sector alternative is available to prevent the 
default of the financial company. To invoke Title II, the following 
would be required:

  1.  a recommendation addressing the eight criteria set out in the 
        Dodd-Frank Act and approved by two-thirds of the members of the 
        Federal Reserve Board of Governors;

  2.  a recommendation by either two-thirds of the members of the 
        Securities and Exchange Commission (if the financial company or 
        its largest U.S. subsidiary is a securities broker or dealer), 
        in consultation with the FDIC; or the Director of the Federal 
        Insurance Office (if the financial company or its largest U.S. 
        subsidiary is an insurance company), in consultation with the 
        FDIC; or two-thirds of the members of the FDIC Board of 
        Directors (in the case of all other financial companies) also 
        addressing the eight statutory criteria set out in the Dodd-
        Frank Act; and

  3.  a determination by the Secretary of the Treasury, in consultation 
        with the President, covering the seven statutory criteria set 
        forth in section 203(b) of the Dodd-Frank Act.

    Following the culmination of the expedited judicial review process 
specified in section 202(a) of the Dodd-Frank Act, the FDIC is 
appointed receiver under Title II. If, however, the covered financial 
company is itself an insurance company, the resolution is conducted 
under applicable state law and the FDIC has backup authority to stand 
in the place of the appropriate state regulatory agency.
Single Point-of-Entry Strategy
    To implement its authority under Title II of the Dodd-Frank Act, 
the FDIC has developed a strategic approach to resolving a SIFI which 
is referred to as Single Point-of-Entry. In a Single Point-of-Entry 
resolution, the FDIC would be appointed as receiver of the top-tier 
parent holding company of the financial group following the company's 
failure and the completion of the recommendation, determination and 
expedited judicial review process set forth in Title II of the Dodd-
Frank Act. Shareholders would be wiped out, unsecured debt holders 
would have their claims written down to reflect any losses that 
shareholders cannot cover, and culpable senior management would be 
    The FDIC would organize a bridge financial company into which the 
FDIC would transfer assets from the receivership estate, including the 
failed holding company's investments in and loans to subsidiaries. 
Equity, subordinated debt, and senior unsecured debt of the failed 
company would likely remain in the receivership and be converted into 
claims. Losses would be apportioned to the claims of former equity 
holders and unsecured creditors according to their order of statutory 
priority. Remaining claims would be converted, in part, into equity 
that will serve to capitalize the new operations, or into new debt 
instruments. This newly formed bridge financial company would continue 
to operate the systemically important functions of the failed financial 
company, thereby minimizing disruptions to the financial system and the 
risk of spillover effects to counterparties.
    The healthy subsidiaries of the financial company would remain open 
and operating, allowing them to continue business and avoid the 
disruption that would likely accompany their closings. Critical 
operations for the financial system would be maintained. Because these 
subsidiaries would remain open and operating as going-concerns, 
counterparties to most of the financial company's derivative contracts 
would have neither a legal right nor a financial motivation to 
terminate and net out their contracts.
    However, creditors at the subsidiary level should not assume that 
they avoid risk of loss. For example, if the losses at the financial 
company are so large that the holding company's shareholders and 
creditors cannot absorb them, then the subsidiaries with the greatest 
losses will have to be placed into resolution, exposing those 
subsidiary creditors to loss.
    Under the Dodd-Frank Act, officers and directors responsible for 
the failure cannot be retained and would be replaced. The FDIC would 
appoint a new Chief Executive Officer and Board of Directors from the 
private sector to run the bridge holding company under the FDIC's 
oversight during the first step of the process.
    During the resolution process, restructuring measures would be 
taken to address the problems that led to the company's failure. These 
could include changes in the company's businesses, shrinking those 
businesses, breaking them into smaller entities, and/or liquidating 
certain assets or closing certain operations. The FDIC also would 
likely require the restructuring of the firm into one or more smaller 
nonsystemic firms that could be resolved under bankruptcy.
    The FDIC expects the well-capitalized bridge financial company and 
its subsidiaries to borrow in the private markets and from customary 
sources of liquidity. The new resolution authority under the Dodd-Frank 
Act provides a back-up source for liquidity support, the Orderly 
Liquidation Fund (OLF). If it is needed at all, the FDIC anticipates 
that this liquidity facility would only be required during the initial 
stage of the resolution process, until private funding sources can be 
arranged or accessed. Much like debtor-in-possession financing in a 
bankruptcy, the OLF can only be used for liquidity and would only be 
available on an over-collateralized fully secured basis. If any OLF 
funds are provided, the OLF must be repaid either from recoveries on 
the assets of the failed firm or, in the unlikely event of a loss on 
the collateralized borrowings, from assessments against the largest, 
most complex financial companies. The law expressly prohibits taxpayer 
losses from the use of Title II authority.
    In our view, the Single Point-of-Entry strategy holds the best 
promise of achieving Title II's goals of holding shareholders, 
creditors and management of the failed firm accountable for the 
company's losses and maintaining financial stability.
Cross-Border Issues
    Addressing the issues associated with the resolution of G-SIFIs is 
challenging. Advance planning and cross border coordination will be 
critical to minimizing disruptions to global financial markets. 
Recognizing that G-SIFIs create complex international legal and 
operational concerns, the FDIC is actively reaching out to foreign host 
regulators to engage in dialogue concerning matters of mutual concern 
and to enter into bilateral Memoranda of Understanding in order to 
address issues associated with cross-border regulatory requirements, to 
gain an in-depth understanding of foreign resolution regimes, and to 
establish frameworks for robust cross-border cooperation and the basis 
for confidential information-sharing, among other initiatives.
Coordination With the United Kingdom, the European Union, Switzerland, 
        and Japan
    As part of our bilateral efforts, the FDIC and the Bank of England, 
in conjunction with the prudential regulators in our respective 
jurisdictions, have been working to develop contingency plans for the 
failure of G-SIFIs that have operations in both the U.S. and the U.K. 
Of the 28 G-SIFIs designated by the Financial Stability Board (FSB) \2\ 
of the G20 countries, four are headquartered in the U.K, and another 
eight are headquartered in the U.S. Moreover, approximately 70 percent 
of the reported foreign activities of the eight U.S. G-SIFIs emanates 
from the U.K. The magnitude of these financial relationships makes the 
U.S.-U.K. bilateral relationship by far the most significant with 
regard to the resolution of G-SIFIs. As a result, our two countries 
have a strong mutual interest in ensuring that, if such an institution 
should fail, it can be resolved at no cost to taxpayers and without 
placing the financial system at risk. An indication of the close 
working relationship between the FDIC and U.K authorities is the joint 
paper on resolution strategies that the FDIC and the Bank of England 
released in December 2012. \3\ This joint paper focuses on the 
application of ``top-down'' resolution strategies for a U.S. or a U.K. 
financial group in a cross-border context and addressed several common 
considerations to these resolution strategies.
     \2\ The Financial Stability Board is an international member 
organization established in 2009 to develop and promote the 
implementation of effective regulatory and supervisory policies.
     \3\ ``Resolving Globally Active, Systemically Important, Financial 
Institutions''. http://www.fdic.gov/about/srac/2012/gsifi.pdf.
    In addition to the close working relationship with the U.K., the 
FDIC is coordinating with representatives from other European 
regulatory bodies to discuss issues of mutual interest including the 
resolution of European G-SIFIs. The FDIC and the European Commission 
(E.C.) have established a joint Working Group comprised of senior 
executives from the FDIC and the E.C. The Working Group convenes 
formally twice a year--once in Washington, once in Brussels--with 
ongoing collaboration continuing in between the formal sessions. The 
first of these formal meetings took place in February 2013. Among the 
topics discussed at this meeting was the E.C.'s proposed Recovery and 
Resolution Directive, which would establish a framework for dealing 
with failed and failing financial institutions and which is expected to 
be finalized this spring. The overall authorities outlined in that 
document have a number of parallels to the SIFI resolution authorities 
provided here in the U.S. under the Dodd-Frank Act. The next meeting of 
the Working Group will take place in Brussels later this year.
    The FDIC also has engaged with Swiss regulatory authorities on a 
bilateral and trilateral (including the U.K.) basis. Through these 
meetings, the FDIC has further developed its understanding of the Swiss 
resolution regime for G-SIFIs, including an in-depth examination of the 
two Swiss-based G-SIFIs with significant operations in the U.S. We have 
made substantial progress in establishing a strong framework for the 
sharing of information and for coordination with respect to the 
resolution of G-SIFIs operating in our respective jurisdictions.
    The FDIC has had bilateral meetings with Japanese authorities. In 
March 2013, FDIC staff attended meetings hosted by the Deposit 
Insurance Corporation of Japan to discuss the FDIC's resolution 
strategy under the Orderly Liquidation Authority and the treatment of 
qualified financial contracts under the Dodd-Frank Act. That same 
month, the FDIC hosted a meeting with representatives of the Japan 
Financial Services Agency (JFSA) to discuss our respective resolution 
regimes. Representatives of the JFSA provided a detailed description of 
the current legislative proposal to amend Japan's existing resolution 
regime to enhance authorities' ability to resolve SIFIs. These 
bilateral meetings, including an expected principal level meeting later 
this year, are part of our continued effort to work with Japanese 
authorities to develop a solid framework for coordination and 
information-sharing with respect to resolution, including through the 
identification of potential impediments to the resolution of G-SIFIs 
with significant operations in both jurisdictions.
    To place these working relationships in perspective, the U.S., the 
U.K., the European Union, Switzerland, and Japan account for the home 
jurisdictions of 27 of the 28 G-SIFIs designated by the FSB and the 
Basel Committee on Banking Supervision in November 2012. Progress in 
these cross-border relationships is thus critical to addressing the 
international dimension of SIFI resolutions.
Multilateral Initiatives
    The FDIC also has been active in multilateral initiatives promoting 
international financial stability through the FSB--and in particular 
its efforts to establish greater cross-border resolution coordination--
through the Resolution Steering Group, the Cross-border Crisis 
Management Group and a number of technical working groups. 
Additionally, the FDIC has been the cochair of the Cross-border Bank 
Resolution Group of the Basel Committee on Banking Supervision since 
its inception in 2007.
    Resolution regimes have been identified as a priority area by the 
FSB. In April 2013, the FSB published the findings of the first Peer 
Review on Resolution Regimes. \4\ The review, which was conducted by a 
team led by the FDIC, focused on compliance with international 
financial principles developed by the FSB and endorsed by the G20 for 
the key attributes of resolution. \5\ The objectives of the review were 
to encourage consistent cross-country and cross-sector implementation; 
to evaluate (where possible) the extent to which standards and policies 
have had their intended results; and to identify gaps and weaknesses in 
reviewed areas and to make recommendations for potential follow-up 
(including via the development of additional principles) by FSB 
     \4\ Financial Stability Board, ``Implementing the Key Attributes 
of Effective Resolution Regimes--How Far Have We Come?'' http://
     \5\ Financial Stability Board, ``Key Attributes of Effective 
Resolution Regimes'', http://www.financialstabilityboard.org/
    The FDIC also has evaluated information and strategies concerning 
G-SIFI resolution regimes prepared by U.S. and foreign authorities in 
the course of its involvement with multilateral cross-border 
initiatives, most notably the Crisis Management Group process 
established by the FSB, including efforts to develop resolvability 
assessments for individual G-SIFIs. These ongoing institution-specific 
resolution planning efforts have underscored the complex structure of 
the large G-SIFIs that may become subject to the FDIC's Orderly 
Liquidation Authority.
    In conclusion, the FDIC, working with our foreign colleagues, has 
made substantial progress in one of the most challenging areas of the 
financial reforms adopted in the Dodd-Frank Act. The cross-border 
issues presented by the failure of a G-SIFI with international 
operations are complex and difficult. The new authorities granted to 
the FDIC under Title I and Title II of the Dodd-Frank Act provide a 
statutory framework to address these important issues. While much work 
remains to be done, the FDIC is much better positioned today to address 
the failure of one of these institutions.
  Director, Division of Banking Supervision and Regulation, Board of 
                Governors of the Federal Reserve System
                              May 15, 2013
    Chairman Warner, Ranking Member Kirk, and other Members of the 
Subcommittee, I appreciate the opportunity to testify today on the 
challenges to achieving an orderly cross-border resolution of a failed 
systemic financial firm. In my remarks, I would like to first reflect 
on the improvements that have been made in the last few years in the 
underlying strength and resiliency of the largest U.S. banking firms, 
and then turn to a discussion of what has been accomplished and what 
remains to be accomplished in facilitating a cross-border resolution.
A Look Back
    The recent financial crisis was unprecedented in its scope and 
severity. Some of the world's largest financial firms nearly or 
completely collapsed, sending shock waves through the highly 
interconnected global financial system. The crisis made clear that our 
regulatory framework for reducing the probability of failure of 
systemic financial firms was insufficient and that Governments 
everywhere had inadequate tools to manage the failure of a systemic 
financial firm.
    Since 2008, the United States and the international regulatory 
community have made meaningful progress on policy reforms to reduce the 
moral hazard and other risks associated with financial firms perceived 
to be too big to fail. In broad terms, these reforms seek to eliminate 
too big to fail in two ways: (1) by reducing the probability of failure 
of systemic financial firms through stronger capital and liquidity 
requirements and heightened supervision, and (2) by reducing the costs 
to the broader system in the event of the failure of such a firm. My 
testimony today relates principally to the second of these two aspects 
of reform, but I want to begin by highlighting some of the material 
achievements we have made to reduce the likelihood of failure of 
systemic financial firms.
    The Basel III capital and liquidity reforms are the foundation of 
the global efforts to improve the resilience of the international 
banking system. These reforms are being implemented in the United 
States and elsewhere. In addition, the Federal Reserve has 
significantly strengthened its supervision of the largest, most complex 
financial firms since the financial crisis. For example, the Federal 
Reserve now conducts rigorous annual stress tests of the capital 
adequacy of our largest bank holding companies. As a result of these 
efforts, the overall strength of the largest U.S. banking firms has 
significantly improved. The aggregate tier 1 common equity ratio of the 
18 largest U.S. banking firms has more than doubled, from 5.6 percent 
of risk-weighted assets at the end of 2008 to 11.3 percent at the end 
of 2012. In absolute terms, these firms have increased their aggregate 
levels of tier 1 common equity from just under $400 billion in late 
2008 to almost $800 billion at the end of 2012. Higher capital puts 
these firms in a much better position to absorb future losses and 
continue to fulfill their vital role in the economy. In addition, the 
U.S. banking system's liquidity position relative to precrisis levels 
has materially improved.
Accomplishments to Date on Cross-Border Resolution
    Congress and U.S. regulators have made substantial progress since 
the crisis in improving the process for resolving systemic financial 
firms. The core areas of progress include adoption and implementation 
of statutory resolution powers, adoption and implementation of 
resolution planning requirements, increased international coordination 
efforts, and the Federal Reserve's foreign bank regulatory proposal.
    Title II of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) created the Orderly Liquidation 
Authority (OLA), a statutory resolution mechanism designed to improve 
the prospects for an orderly resolution of a systemic financial firm. 
In many ways, OLA has become a model resolution regime for the 
international community. The Financial Stability Board (FSB) in 2011 
adopted the ``Key Attributes of Effective Resolution Regimes for 
Financial Institutions'', a new standard for resolution regimes for 
systemic firms. \1\ The core features of this global standard are 
already embodied in OLA. By acting early through the passage of the 
Dodd-Frank Act, Congress paved the way for the United States to be a 
leader in shaping the development of international policy for effective 
resolution regimes for systemic financial firms.
     \1\ See, www.financialstabilityboard.org/publications/
    The Federal Reserve supports the progress made by the Federal 
Deposit Insurance Corporation (FDIC) in implementing OLA, including, in 
particular, by developing a single-point-of-entry (SPOE) \2\ resolution 
approach. SPOE is designed to focus losses on the shareholders and 
long-term unsecured debt holders of the parent holding company of the 
failed firm. It aims to produce a well-capitalized bridge holding 
company in place of the failed parent by converting long-term debt 
holders of the parent into equity holders of the bridge. The critical 
operating subsidiaries of the failed firm would be re-capitalized, to 
the extent necessary, and would remain open for business. The SPOE 
approach should work to significantly reduce incentives for creditors 
and customers of the operating subsidiaries to run and for host-country 
regulators to engage in ring-fencing or other measures disruptive to an 
orderly, global resolution of the failed firm.
     \2\ In a SPOE resolution under Title II of the Dodd-Frank Act, the 
FDIC is appointed as a receiver of the top-tier holding company to 
carry out the resolution of the company.
    The Dodd-Frank Act requires all large bank holding companies to 
develop, and submit to supervisors, resolution plans. The largest U.S. 
bank holding companies and foreign banking organizations submitted 
their first annual resolution plans to the Federal Reserve and the FDIC 
in the third quarter of 2012. These ``first-wave'' resolution plans 
have yielded valuable information that is being used to identify, 
assess, and mitigate key challenges to resolvability under the 
Bankruptcy Code and to support the FDIC's development of backup 
resolution plans under OLA. These plans are also very useful 
supervisory tools that have helped the Federal Reserve and the firms 
focus on opportunities to simplify corporate structures and improve 
management systems in ways that will help the firms be more resilient 
and efficient, as well as easier to resolve.
    Internationally, the Federal Reserve has been an active participant 
in the FSB's work to address the challenges of cross-border 
resolutions. For example, the Federal Reserve, together with the FDIC, 
participated in the development of the ``Key Attributes''. We are also 
an active participant in the FSB's many committees and technical 
working groups charged with developing policy guidance on a broad range 
of technical areas that affect the feasibility of cross-border 
resolution. Moreover, as the home-country supervisor of 8 of the 28 
global systemically important banks (G-SIBs) identified by the FSB, the 
Federal Reserve has the responsibility of establishing and routinely 
convening for each U.S. G-SIB a crisis management group. These firm-
specific crisis management groups, which are comprised primarily of the 
firm's prudential supervisors and resolution authorities in the United 
States and key foreign jurisdictions, are working to mitigate potential 
cross-border obstacles to an orderly resolution of the firms.
    Last year, the Federal Reserve also sought public comment on a 
proposal that would generally require foreign banks with a large U.S. 
presence to organize their U.S. subsidiaries under a single 
intermediate holding company that would serve as a platform for 
consistent supervision and regulation. \3\ Just as other countries 
already apply Basel capital requirements to U.S. bank subsidiaries 
operating in their countries, our proposal would subject the U.S. 
intermediate holding companies of foreign banks to the same capital and 
liquidity requirements as U.S. bank holding companies. We believe that 
the proposal would significantly improve our supervision and regulation 
of the U.S. operations of foreign banks, help protect U.S. financial 
stability, and promote competitive equity for all large banking firms 
operating in the United States. The proposal would enhance the ability 
of the United States, as a host-country regulator, to cooperate with a 
firm-wide, global resolution of a foreign banking organization led by 
its home-country authorities.
     \3\ See, Board of Governors of the Federal Reserve System (2012), 
``Federal Reserve Board Releases Proposed Rules To Strengthen the 
Oversight of U.S. Operations of Foreign Banks'', press release, 
December 14, www.federalreserve.gov/newsevents/press/bcreg/
Challenges Ahead on Cross-Border Resolution
    Despite the progress that is being made within the FSB and in our 
domestic efforts with the FDIC, developing feasible solutions to the 
obstacles presented by cross-border resolution of a systemic financial 
firm remains necessary and work toward this end is under way. The key 
remaining obstacles include (1) adopting effective statutory resolution 
regimes in other countries; (2) ensuring systemic global banking firms 
have sufficient ``gone concern'' loss-absorption capacity; (3) 
completing firm-specific cooperation agreements with foreign regulators 
that provide credible assurances to those host-country regulators to 
forestall disruptive ring-fencing; and (4) coordinating consistent 
treatment of cross-border financial contracts.
    First, although the United States has had OLA in place since 2010, 
and the FDIC has made good progress in developing the framework for 
using OLA over the past 3 years, most other major jurisdictions have 
not yet enacted national legislation that would create a statutory 
resolution regime with the powers and safeguards necessary to meet the 
FSB's ``Key Attributes''. Mitigating the obstacles to cross-border 
resolution will, at a minimum, require key foreign jurisdictions to 
have implemented national resolution regimes consistent with the ``Key 
Attributes''. Therefore, we will continue to encourage our fellow FSB 
member jurisdictions to move forward with such reforms as quickly as 
    Second, key to the ability of the FDIC to execute its preferred 
SPOE approach in OLA is the availability of sufficient amounts of debt 
at the parent holding company of the failed firm. Accordingly, in 
consultation with the FDIC, the Federal Reserve is considering the 
merits of a regulatory requirement that the largest, most complex U.S. 
banking firms maintain a minimum amount of outstanding long-term 
unsecured debt on top of its regulatory capital requirements. Such a 
requirement could have a number of public policy benefits. Most 
notably, it would increase the prospects for an orderly resolution 
under OLA by ensuring that shareholders and long-term debt holders of a 
systemic financial firm can bear potential future losses at the firm 
and sufficiently capitalize a bridge holding company in resolution. In 
addition, by increasing the credibility of OLA, a minimum long-term 
debt requirement could help counteract the moral hazard arising from 
taxpayer bailouts and improve market discipline of systemic firms. 
Switzerland, the United Kingdom, and the European Commission are moving 
forward with similar requirements, and it may be useful to work toward 
an international agreement on minimum total loss absorbency 
requirements for globally systemic firms.
    Third, we need to take additional actions to promote regulatory 
cooperation among home and host supervisors in the event of the failure 
of an internationally active, systemic financial firm. Importantly, OLA 
only can apply to U.S.-chartered entities. Foreign subsidiaries and 
bank branches of a U.S.-based systemic financial firm could be ring-
fenced or wound down separately under the insolvency laws of their host 
countries if foreign authorities did not have full confidence that 
local interests would be protected. Further progress on cross-border 
resolution ultimately will require significant bilateral and 
multilateral agreements among U.S. regulators and the key foreign 
central banks and supervisors for the largest global financial firms. 
It also may require that home-country authorities provide credible 
assurances to host-country supervisors to prevent disruptive forms of 
ring-fencing of the host-country operations of a failed firm. The 
ultimate strength of these agreements will depend on whether they have 
adequately addressed the shared objectives, as well as the self-
interests, of the respective home and host authorities. The groundwork 
for these agreements is being laid, but many of the most critical 
issues can be addressed only after other jurisdictions have effective 
resolution frameworks in place.
    Fourth, we must help ensure that a home-country resolution of a 
global systemic financial firm does not cause key creditors and 
counterparties of the firm's foreign operations to run unnecessarily. 
One of the key challenges to the orderly resolution of an 
internationally active, U.S.-based financial firm is that certain OLA 
stabilization mechanisms authorized under title II of the Dodd-Frank 
Act, including the 1-day stay provision with respect to over-the-
counter derivatives and certain other financial contracts, may not 
apply outside the United States. Accordingly, counterparties to 
financial contracts with the foreign subsidiaries and branches of a 
U.S. firm may have contractual rights and substantial economic 
incentives to terminate their transactions as soon as the U.S. parent 
enters into resolution. Regulators and the industry are focused on the 
potential for addressing this concern through modifications to 
contractual cross-default and netting practices and through other 
means. The Federal Reserve will continue to support these efforts.
    The financial regulatory architecture is stronger today than it was 
in the years leading up to the crisis, but considerable work remains to 
complete implementation of the Dodd-Frank Act and the post-crisis 
global financial reform program. A key prong of that program is making 
sure that Government authorities in the United States and around the 
world can effect an orderly resolution of a systemically important, 
internationally active financial firm. Much has been accomplished in 
this area, but much remains to be done. In the coming years, the 
Federal Reserve will be working with other U.S. financial regulatory 
agencies, and with foreign central banks and regulators, to make an 
orderly resolution of a global systemic financial firm as feasible as 
    Thank you for your attention. I am happy to answer any questions 
you might have.
   Director, Office of International Banking and Securities Markets, 
                       Department of the Treasury
                              May 15, 2013
    Chairman Warner, Ranking Member Kirk, Members of the Senate 
Subcommittee on National Security and International Trade and Finance, 
thank you for this opportunity to testify on the subject of cross-
border resolutions. This is a complex, but critically important part of 
the international efforts to promote regulatory reform, and it is a 
privilege and honor for me to testify at this hearing.
I. G20 and FSB Framework
    The financial crisis of 2007-09 and the subsequent European 
sovereign crisis revealed fundamental weaknesses in some global 
financial institutions. In the aftermath of a number of noteworthy 
financial firm failures, ranging from Lehman Brothers in the United 
States to Northern Rock in the U.K. to Dexia in continental Europe, the 
G20 Leaders agreed at their meeting in Pittsburgh in 2009 to develop 
frameworks and tools for the effective resolution of financial groups 
to help mitigate the disruption from financial institution failures and 
reduce moral hazard in the future.
    The G20 Leaders turned to the Financial Stability Board (FSB) to 
oversee the implementation of their financial regulatory commitments. 
The FSB is a unique international regulatory policy body that comprises 
high-level policy makers from finance ministries, central banks, 
banking supervisors, and market regulators of all the G20 countries and 
other key financial centers, plus key international bodies, such as the 
IMF, World Bank, and the Bank for International Settlements (BIS).
    In October 2010, the FSB recommended a policy framework, which the 
G20 Leaders subsequently endorsed, to address the moral hazard posed by 
global systemically important financial institutions (G-SIFIs) that 
consisted of four key prongs:

    a resolution framework to ensure that all financial 
        institutions can be resolved safely, quickly and without 
        destabilizing the financial system and exposing the taxpayer to 
        the risk of loss;

    a requirement that G-SIFIs have higher loss absorbency 
        capacity to reflect the greater risks that these institutions 
        pose to the global financial system;

    more intensive supervisory oversight for financial 
        institutions that may pose systemic risk; and,

    robust core financial market infrastructures to reduce 
        contagion risk from the failure of individual institutions.

    Today, I will discuss the first prong--the international resolution 
II. The Overarching FSB Framework for Improving the Resolution of 
        Financial Institutions
    All countries need to have effective national resolution systems to 
resolve failing financial institutions in an orderly manner, including 
a legislative and regulatory framework, legal powers, and institutional 
arrangements. An effective national resolution system is a necessary 
prerequisite to an effective cross-border resolution framework. At the 
same time, national resolution systems must be consistent with one 
another to facilitate the orderly cross-border resolution of G-SIFIs. 
Subjecting the same firm to conflicting legal rules, procedures, and 
mechanisms can create uncertainty, instability, possible systemic 
contagion, and higher costs of resolution.
    Accordingly, following the call by the G20 Leaders, the FSB laid 
out an approach to resolution that consisted of the following key 

    a new international standard that countries would implement 
        to ensure a consistent national resolution framework for G-
        SIFIs and other financial institutions;

    making the new international standard, and resolution more 
        generally, a top international priority to ensure that 
        countries would devote the necessary resources to legislative, 
        regulatory, and institutional changes to implement the new 
        international standard;

    an international assessment process to ensure that 
        countries would comply with the new international standard and 
        implement it in a consistent manner across jurisdictions; and

    a framework to resolve individual G-SIFIs.

    The FSB's G-SIFI-specific framework, in turn, called for an 
individual crisis management group (CMG) for each of the G-SIFIs. The 
FSB has currently identified 28 G-SIFI banks. Each of the 28 
corresponding CMGs would have supervisors and resolution authorities 
from the bank's home jurisdiction, as well as from 3-5 other key 
jurisdictions where the institution in question has a major presence. 
These CMGs would be tasked with developing recovery and resolution 
plans for individual firms and developing cooperation agreements among 
the relevant regulators to provide an ex ante agreement on how 
resolutions would be handled. Once planning is complete and cooperation 
agreements are in place, the CMGs would use a ``resolvability 
assessment'' process to determine what other steps are needed to make 
cross-border resolutions possible.
    The above description comprises the G20/FSB's general resolution 
framework. The FSB established a Resolution Steering Group, chaired by 
Bank of England Deputy Governor Paul Tucker and with active U.S. 
participation, to oversee the development of this framework and its 
III. Progress in Completing the New G20/FSB Framework/Strategy
    Much progress has been made, reflecting the high priority and 
considerable time and energy that countries are devoting to the new 
framework. The FSB's Resolution Steering Group developed a new 
international resolution standard, called the ``Key Attributes of 
Effective Resolution Regimes for Financial Institutions''. The ``Key 
Attributes'' offer over 100 specific recommendations in 12 general 
areas, including resolution authorities and powers, recovery and 
resolution planning, funding, safeguards, segregation of client assets, 
cross-border cooperation, and information sharing. In July 2011, the 
Resolution Steering Group issued the Key Attributes for public comment 
and, in November 2011, the G20 Leaders endorsed the new standard.
    The FSB's Resolution Steering Group is now developing an assessment 
methodology that independent assessors can use as a yardstick to 
measure jurisdictions' progress in implementing the ``Key Attributes''. 
In cooperation with the FSB, the IMF and the World Bank have launched a 
pilot project to test the methodology in two jurisdictions. Lessons 
learned in these pilot assessments will feed into the final 
methodology. Once this process is complete, we expect that the FSB will 
add the ``Key Attributes'' to its list of 12 key international 
standards and codes. The key standards and codes represent minimum 
requirements for good practice in areas such as banking supervision, 
securities regulation, accounting, and antimoney laundering that 
countries are encouraged to meet or exceed. The FSB has identified 
these standards as meriting priority implementation by all countries. 
This, in turn, would mean that the IMF and the World Bank could add the 
Key Attributes to their regular analysis of a country's financial 
sector through their Financial Sector Assessment Program, which they 
apply to 190 or so countries worldwide.
    The FSB itself has recently completed the first of many peer 
reviews to measure progress across its 24 member jurisdictions in 
implementing the ``Key Attributes''. FDIC Chairman Martin Gruenberg 
chaired the FSB's review, which found that the United States is leading 
the globe in implementing its own effective resolution regime that was 
created under Title II of the Dodd-Frank Act. The FSB peer review also 
found that outside the United States, implementation of the ``Key 
Attributes'' remains at an early stage, and many jurisdictions still 
lack the necessary powers and institutions to resolve effectively 
either G-SIFIs or other financial institutions.
    Still, while other jurisdictions lag behind the United States, 
progress is occurring. In Europe, major jurisdictions, including 
France, Germany, the Netherlands, Switzerland, and the U.K., have 
proposed or passed legislation for resolution frameworks that are 
largely consistent with the ``Key Attributes''. The European Commission 
is working to finalize its own Bank Recovery and Resolution Directive 
in June of this year, which all 27 member States in the European Union 
would be expected to implement. The European Union is also working on a 
larger European effort to develop a true banking union, with a single 
supervisory mechanism and a single resolution authority for the euro 
    In Asia, jurisdictions including Japan, Singapore, and Hong Kong 
have proposed, or are preparing to propose, resolution reforms, while 
other jurisdictions are still considering their approach.
    In addition to developing the ``Key Attributes'', the FSB's 
Resolution Steering Group is continuing to work on specific aspects of 
cross-border resolution, including the treatment of client assets, the 
scope and prerequisites for information sharing between different 
authorities, and the resolution of derivatives central counterparties. 
The latter is expected to become vital linchpins of the financial 
system as derivatives reforms begin to take effect in major 
    The FSB and national authorities have also made important progress 
in enabling the resolution of individual firms. Most FSB member 
countries that are home to G-SIFIs have developed high-level national 
resolution strategies and discussed these with key host authorities in 
their CMGs. To date, CMGs have been established for each of the 28 G-
SIFIs, and nearly all CMGs have already met at least once. Each CMG is 
working to develop recovery and resolution plans for its respective 
institution and to negotiate cooperation agreements, or ``COAGs,'' 
among all of its member authorities. Resolvability assessments are 
scheduled for 2014 to determine what we have achieved so far and what 
remains to be done to make each G-SIFI resolvable.
IV. Next Steps
    While much has been accomplished, there is much more still to do. 
The United States has 75 years of experience in resolving financial 
institutions, but many countries have only recently realized the need 
to implement an effective resolution regime. They must develop and 
operationalize the principles contained in the ``Key Attributes'' if 
the resolution of G-SIFIs with cross-border operations is to be made 
credible. Our focus is currently on three interrelated efforts: first, 
finalizing cooperation agreements and building trust between national 
regulators, so that we can successfully cooperate to resolve large 
international institutions across borders with minimum disruption to 
the global financial system; second, encouraging foreign jurisdictions 
to build more flexibility into their resolution frameworks to allow 
coordinated resolutions to become feasible; and third, establishing 
strong lines of communication and information-sharing among relevant 
national authorities.
    In addition, the FSB Resolution Steering Group continues to work in 
the following areas:

    completing the resolution planning process and finalizing 
        cooperation agreements for each G-SIFI;

    developing supplemental guidance containing clear 
        principles to address: (i) information sharing for resolution 
        purposes; (ii) the protection of client assets in resolution; 
        (iii) the resolution of financial market infrastructures 
        (FMIs); and, (iv) the resolution of insurers;

    finalizing the ``Key Attributes'' Methodology (public 
        consultation, pilot assessments);

    following up on the recommendations of the peer review on 
        resolution regimes; and,

    planning for a resolvability assessment process for G-SIFIs 
        that should be launched in early 2014.

    The experience with the recent bank failures in Cyprus, including 
an initial proposal to haircut insured depositors, has refocused 
attention within Europe on the importance of an effective resolution 
framework. Cyprus had no resolution statute and its parliament was 
required to draft and approve legislation in only a few days, which in 
the event did not impair insured depositors. However, this has 
reinforced the need in Europe to make progress on implementing 
resolution systems, including a depositor preference regime. It is 
important that the FSB build on the ``Key Attributes'' and include 
specific depositor preference and creditor hierarchy.
V. Conclusion
    Keeping our focus on these efforts is vital. The financial crisis 
made clear that the failure of large, international financial firms can 
result in systemic damage that does not stop at national borders and 
can directly impact the day-to-day lives of people around the world. 
This risk and the complexity of today's global financial system make 
international cooperation and understanding among national regulators 
absolutely necessary. The FSB is playing a vital role in bringing 
domestic and foreign regulators together to build the capacity, the 
mutual trust, and the communication networks necessary to make possible 
the resolution of systemic financial institutions without the risk of 
systemic damage, a risk we now know is all too real.
                      FROM JAMES R. WIGAND

Q.1. Dodd-Frank did not specifically enact any new anti-money 
laundering laws. However, in what ways has the Act impacted 
existing Federal oversight of AML and BSA compliance in each of 
your agencies?

A.1. As you note in your question, the Dodd-Frank Act did not 
enact any new anti-money laundering (AML) laws. For the FDIC, 
the biggest impact on our oversight of AML and Bank Secrecy Act 
(BSA) compliance in recent years were the significant changes 
incorporated into the BSA with the passage of the USA Patriot 
Act in October 2001. In particular, 327 of the USA Patriot Act 
addresses the effectiveness of insured depository institutions 
in combatting money laundering activities specifically when an 
institution proposes a merger. For practical purposes, the 
statute requires the agency to consider the existence of any 
supervisory action that includes BSA/AML provisions when 
processing a merger application.
    Generally, the statute requires that a merger cannot be 
approved with any of the following outstanding issues:

    1. Unresolved BSA/AML program violations or provisions in 
enforcement actions; such violations would result from failures 
of any component in the BSA/AML Program requirements, which 

    a.  System of internal controls;

    b.  Independent review of the BSA/AML Compliance Program;

    c.  BSA Officer responsible for daily BSA/AML activities;

    d.  BSA/AML training; and

    e.  Customer Identification Program.

    2. Pending AML investigations or supervisory actions; or

    3. Outstanding AML investigations, actions, or pending 
matters with other relevant agencies (such as Treasury, FinCEN, 
or law enforcement).

    With respect to large, complex institutions, such as those 
raising concerns regarding cross-border resolutions, the FDIC's 
direct supervisory role includes the processing of applications 
seeking to merge the uninsured entity into an insured 
institution (for example, merging a mortgage subsidiary into an 
insured bank). We have noted a nominal increase in the number 
of such merger proposals, which are governed by Section 18 of 
the FDI Act and which generally seek to rationalize or 
consolidate corporate structures. In each case, the FDIC must 
consider each applicable statutory factor, including the 
effectiveness of the insured institutions involved in the 
merger in combatting money laundering activities.
    Separately, we note that large, complex insured 
institutions generally have a full range of cross-border 
activities and relationships. In terms of off-site analysis and 
the review of various applications, we evaluate the primary 
Federal regulator's assessment of the bank's compliance with 
all aspects of the law and regulations, including the BSA.
    Sections 313 and 319 of the USA Patriot Act amended the BSA 
to prohibit U.S. financial institutions from maintaining 
accounts in the U.S. for foreign shell banks and require record 
keeping for certain foreign correspondent accounts. To comply 
with this regulation, financial institutions need to conduct 
enhanced due diligence to ensure it knows the owners of the 
account relationship and the activity in the account 
corresponds to the U.S. bank's expectations for that 

                     FROM MICHAEL S. GIBSON

Q.1. During the Banking Committee's March hearing on money 
laundering, Governor Powell noted that the Federal Reserve 
played a key role in developing standards that improved 
transparency in cross-border payment messages, including the 
standards adopted by Basel and SWIFT. These standards required 
the expanded disclosure of the originator and beneficiary on 
payment instructions sent as part of cover payments. 
Manipulation of this information not only facilitates money 
laundering, but also sanctions evasion, as we have seen in 
numerous cases.
    Isn't it true though that, even after about 20 years have 
gone by, this information is still not actually required to be 
collected under the Bank Secrecy Act or its ``record keeping 
and travel'' rules issued jointly by the Fed and FinCEN?
    As stated at that hearing, both the Treasury and the 
Federal Reserve participate in an AML task force at the 
principals level. Has this BSA issue been addressed there, yet?
    Even if banks may be hesitant, on their own volition, to 
accept such payment messages without all the fields completed, 
would such a gap in the law make it difficult to prosecute a 
violator who abuses the payment instruction? What effect has 
this on compliance with a Deferred Prosecution Agreement?

A.1. The record keeping and travel rules issued by the Board 
and FinCEN in 1995 require U.S. financial institutions, at the 
initiation of a funds transfer, to collect and retain the name 
of the originator (and, if received with an incoming funds 
transfer order, the name of the recipient) on funds transfers 
in excess of $3,000. From a compliance standpoint, U.S. 
financial institutions routinely screen the payment messages 
that accompany these funds transfers for compliance with U.S. 
economic sanctions. Foreign banks that operate in countries 
without rules similar to those imposed by the U.S. have not 
always had in place the mechanisms to ensure transactions 
routed through the U.S. comply with U.S. law.
    The Board has a history of taking action against the 
institutions we supervise as needed to address unsafe or 
unsound banking practices in this area, including against those 
who omit, delete or alter information in payment messages or 
orders for the purpose of avoiding detection of that 
information by any other financial institution in the payment 
process. However, the Board does not have the legal authority 
to impose criminal penalties against financial institutions for 
violations of U.S. economic sanctions, and does not use 
Deferred Prosecution Agreements (DPAs). The Department of 
Justice and other criminal law enforcement authorities have 
used DPAs as an enforcement tool against banking entities and 
others that violate the law, and have primary responsibility 
for monitoring and assessing compliance under such agreements.
    Currently, as a member of the U.S. Department of the 
Treasury's Interagency Task Force on Strengthening and 
Clarifying BSNAML Framework (Task Force), the Board is engaged 
in a review of the BSA, its implementation, and its enforcement 
with respect to U.S. financial institutions that are subject to 
these requirements. Task Force discussions are at an early 
stage and findings and recommendations are still being worked 
    As you point out, the Dodd-Frank Act did not enact any new 
anti-money laundering requirements. The Act has not had a 
significant effect on the Federal Reserve's supervisory program 
related to BSNAML compliance.

Q.2. Dodd-Frank did not specifically enact any new anti-money 
laundering laws. However, in what ways has the Act impacted 
existing Federal oversight of AML and BSA compliance in each of 
your agencies?

A.2. Please see response to Question 1.