Banks should have living wills in case of failure, FDIC says
In case of pending death, the country’s major banks should have living wills, the Federal Deposit Insurance Corp. proposed Tuesday, so that they can be shut down if need be in an orderly fashion.
As the liquidator of failed banks, the FDIC is called upon to deal with too-big-to-fail firms whose collapse could threaten the nation’s financial system. The FDIC said its proposal would complement federal legislation aimed at preventing a replay of the spectacle of big banks that had to be propped up with trillions of dollars of direct and indirect federal aid when the financial crisis erupted.
The proposal, which could be adopted without new legislation, will be open for comment from banks and other parties for 60 days. In announcing it, FDIC Chairwoman Sheila Bair acknowledged that regulatory failures contributed to the financial debacle.
“Critically, the lack of an effective resolution process for the large, complex financial institutions limited regulators’ ability to manage the crisis,” she said. “As we now know, early planning and preparation is the key to avoiding bailouts.”
The proposed rule would affect about 40 banks, many of which are parts of larger financial enterprises with affiliates and parent companies that often offer nonfinancial products and services. The parent companies’ assets total $8.3 trillion, and the banks hold about 48% of all federally insured deposits.
The idea would be to have the financial firms and the FDIC craft a blueprint for separating the banks and their insured deposits from the other operations of the companies and shutting the banks down without sending jolts through other companies and the economy.
The financial industry does not generally object to the concept of living wills for banks but has concerns that they could duplicate the risk analysis and contingency planning that financial firms already share with their principal federal regulators, the Office of the Comptroller of the Currency and the Federal Reserve.
“We’re already doing this,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, the trade association for major banks.
Another potential problem, Talbott said, is that the FDIC might use a snapshot of a bank’s operations that could quickly become outdated. It would be better, he said, to have the FDIC and other regulators continuously assess risks and plan for contingencies, including what he termed “doomsday scenarios.”
The new rules would apply to banks that have at least $10 billion in assets and whose parent companies have at least $100 billion in assets. The only California institution that would qualify is San Francisco-based Wells Fargo Bank, which is one of the four major banks in the country along with JPMorgan Chase Bank, Bank of America and Citibank.
