[Senate Hearing 113-29]
[From the U.S. Government Publishing Office]
S. Hrg. 113-29
IMPROVING CROSS-BORDER RESOLUTION TO BETTER
PROTECT TAXPAYERS AND THE ECONOMY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
NATIONAL SECURITY AND INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE ACTIONS OF THE FDIC TO IMPROVE CROSS-BORDER RESOLUTION OF
ANY FAILING, GLOBALLY ACTIVE FINANCIAL INSTITUTION
__________
MAY 15, 2013
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
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
HEIDI HEITKAMP, North Dakota
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
(ii)
C O N T E N T S
----------
WEDNESDAY, MAY 15, 2013
Page
Opening statement of Chairman Warner............................. 1
Opening statements, comments, or prepared statements of:
Senator Kirk................................................. 4
WITNESSES
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
(iii)
IMPROVING CROSS-BORDER RESOLUTION TO BETTER PROTECT TAXPAYERS AND THE
ECONOMY
----------
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.
OPENING STATEMENT OF CHAIRMAN MARK R. WARNER
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
witnesses.
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
invoked.
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.
STATEMENT OF SENATOR MARK KIRK
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.
STATEMENT OF JAMES R. WIGAND, DIRECTOR, OFFICE OF COMPLEX
FINANCIAL INSTITUTIONS, FEDERAL DEPOSIT INSURANCE CORPORATION
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
issues.
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
Act.
Chairman Warner. Thank you, Mr. Wigand.
Mr. Gibson.
STATEMENT OF MICHAEL S. GIBSON, DIRECTOR, DIVISION OF BANKING
SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL
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
resolution.
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
jurisdictions.
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.
STATEMENT OF WILLIAM C. MURDEN, DIRECTOR, OFFICE OF
INTERNATIONAL BANKING AND SECURITIES MARKETS, DEPARTMENT OF THE
TREASURY
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.
[Laughter.]
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
operations.
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.
[Laughter.]
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
U.S.
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
distress.
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
jurisdictions.
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
provided.
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
bailout.
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.
Gibson.
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.
[Laughter.]
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
problems.
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
contracts.
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
remaining.
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
generally----
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
institution?
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
are.
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
Directive.
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.
[Laughter.]
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
effective.
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
economy.
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
that.
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:]
PREPARED STATEMENT OF JAMES R. WIGAND
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
processes.
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
instructions.
---------------------------------------------------------------------------
\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
flows.
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
replaced.
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
members.
---------------------------------------------------------------------------
\4\ Financial Stability Board, ``Implementing the Key Attributes
of Effective Resolution Regimes--How Far Have We Come?'' http://
www.financialstabilityboard.org/publications/r_130419b.pdf.
\5\ Financial Stability Board, ``Key Attributes of Effective
Resolution Regimes'', http://www.financialstabilityboard.org/
publications/r_111104cc.pdf.
---------------------------------------------------------------------------
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.
Conclusion
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.
______
PREPARED STATEMENT OF MICHAEL S. GIBSON
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/
r_111104cc.pdf.
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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.
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\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.
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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.
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\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/
20121214a.htm.
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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
possible.
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.
Conclusion
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
possible.
Thank you for your attention. I am happy to answer any questions
you might have.
______
PREPARED STATEMENT OF WILLIAM C. MURDEN
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
framework.
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
elements:
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
implementation.
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
area.
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
jurisdictions.
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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
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
include:
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
relationship.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
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
on.
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.