FDIC adds more flesh to “single point of entry” resolution plans, but questions remain
By Henry Engler, Compliance Complete
NEW YORK, Dec. 18 (Thomson Reuters Accelus) – The Federal Deposit Insurance Corporation, under mounting pressure from the industry for greater clarity, announced on Tuesday additional details on its “Single Point of Entry” resolution plans for failed banks.
The basic concept is to close the holding company of a failed firm, and transfer its healthy subsidiaries into a new bridge institution that could be managed while the resolution of the defunct company proceeds. Shareholders would be wiped out under the plan, while unsecured creditors could seek equity claims as a means to recapitalize the new institution. Should the subsidiaries require liquidity to operate, they would borrow from the bridge, which in turn may borrow from an “orderly liquidation fund” funded by the U.S. Treasury.
But while FDIC officials have been touting “SPE” strategy, details have been lacking. Many in the industry have sought more specifics on the structure of the bridge firms and how the FDIC would utilize a Treasury Department liquidity fund to help manage a systemic resolution.
Key features of the SPE plan announced by the FDIC include the following:
- “Fresh start model” – After consultation with the Securities Exchange Commission, the FDIC concluded that the so-called “fresh start model” was “the most appropriate accounting treatment to establish the new basis for financial reporting for the emerging company. The fresh start model requires the determination of a fair value measurement of the assets of the company, which represents the price at which each asset would be transferred between market participants at an established date.”
- Resolution period — The FDIC’s goal is to limit the time during which the failed covered financial company is under public control and expects the bridge financial company to be ready to execute its securities-for-claims exchange within six to nine months.
- Termination of bridge company — The termination of the bridge financial company would only occur once it is clear that a plan for restructuring, which can be enforced, has been approved by the FDIC, and that NewCo (or NewCos) would meet or exceed regulatory capital requirements. This would ensure that NewCo (or NewCos) would not pose systemic risk to the financial system and would lead to NewCo (or NewCos) being resolvable under the Bankruptcy Code.
- Board responsibilities — Before termination of the bridge company the board of directors and management would have to formulate a plan and a timeframe for restructuring that would make the company resolvable under the Bankruptcy Code.
As to the potential use of the U.S. Treasury’s OLF, the FDIC said, “It might be necessary, however, in the initial days following the creation of the bridge financial company for the FDIC to use the OLF to provide limited funding or to guarantee borrowings to the bridge financial company in order to ensure a smooth transition for its establishment.” But it also cautioned that such resources “can only be used for liquidity purposes, and may not be used to provide capital support to the bridge company.”
Foreign operations remain a challenge
Critics of the plan have pointed to difficulties of unwinding a large U.S. institution with multiple foreign operations. For example, would host-country regulators keep these foreign entities out of receivership or liquidation?
Responding to the international dimension of large institutions, the FDIC said:
“Foreign subsidiaries are independent entities, separately chartered or licensed in their respective countries, with their own capital base and funding sources. . . As long as foreign subsidiaries can demonstrate that they are well-capitalized and self-sustaining, the FDIC would expect them to remain open and operating and able to fund their operations from customary sources of credit through normal borrowing facilities.
“It’s a really challenging,” said Karen Petrou, managing director of Federal Financial Analytics in Washington D.C. “The practicalities are so difficult that we really need to rethink this. It may be only viable as a U.S. solution.”
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)