Saturday, May 14, 2011

Deathbed Designations

One of the biggest issues outstanding in financial reform is which institutions the Financial Stability Oversight Committee (FSOC) will deem “systemically important,” and thus subject to all the enhanced Title I regulations. These systemically important financial institutions, known as SIFIs, will presumably be subject to the new resolution authority rather than the bankruptcy code — although for some reason SIFIs aren’t automatically subject to the resolution authority, a problem which I pointed out within hours of the Treasury releasing its initial legislative language back in 2009. In spite of that anomaly, SIFIs will be required to continually submit comprehensive “resolution plans” to the FDIC, so that the FDIC will have all the information they need to plan, design, and execute a successful resolution of a SIFI. As I’ve said before (see here and here), and as Sheila Bair has been emphasizing repeatedly in recent weeks, the resolution plan requirement is hugely important.

Dodd-Frank does, however, leave open the possibility that a failing financial institution could be designated as a SIFI at the last minute, and then immediately handed over to the FDIC to resolve under the new resolution authority. In that situation, the FDIC would be forced to resolve an institution without the benefit of a resolution plan — that is, without the comprehensive information on organizational structure, funding practices, major counterparties, etc., that will be required in resolution plans. Bair calls these “deathbed designations” (which, you have to admit, is a clever name), and has been understandably arguing that this situation “should be avoided at all costs.”

But how do you avoid “deathbed designations”? Bair argues that the FDIC should be allowed to collect information from a broad class of potential SIFIs:

[W]e need to be able to collect detailed information on a limited number of potential SIFIs as part of the designation process. We should provide the industry with some clarity about which firms will be expected to provide the FSOC with this additional information, using simple and transparent metrics such as firm size, similar to the approach used for bank holding companies under the Dodd-Frank Act. This should reduce some of the mystery surrounding the process and should eliminate any market concern about which firms the FSOC has under its review. In addition, no one should jump to the conclusion that by asking for additional information, the FSOC has preordained a firm to be “systemic.” It is likely that, after we gather additional information and learn more about these firms, relatively few of them will be viewed as systemic, especially if the firms can demonstrate their resolvability in bankruptcy at this stage of the process.
Frankly, I don’t see any other option. Bair is right that “deathbed designations” are the worst of all worlds. At the same time, we can’t rely on the FSOC to accurately identify every single SIFI ahead-of-time, in perpetuity.

The question, then, is: how much and what kinds of information should the FDIC collect from potential SIFIs? One thing to keep in mind is that the FSOC, in figuring out which institutions should be designated as SIFIs, will necessarily be collecting some information from potential SIFIs as well. But that information probably won’t be the same information that the FDIC would ideally want to collect — and since the FDIC is the one responsible for planning and executing these difficult resolutions, I think they should have reasonably broad discretion to say what information they need to collect ahead-of-time.

I think the best approach would be to allow the FDIC to collect the important information that isn’t constantly changing — e.g., typical funding practices mapped the institution’s legal structure, descriptions of the institution’s major business lines, potential acquirers of the major business lines, and so on. Detailed balance sheet information at major financial institutions is typically stale in a matter of days, so requiring that kind of information would probably be more trouble than it’s worth (especially if the institution has 10-Qs and 10-Ks available).

I also don’t see why the required information couldn’t be collected from potential SIFIs discreetly. That would eliminate Bair’s concern about people “jump[ing] to the conclusion that by asking for additional information, the FSOC has preordained a firm to be ‘systemic.’” Financial institutions communicate confidentially with regulators all the time, and I don’t see why this should be any different.

In any event, it’ll be interesting to see if Bair can press upon the FSOC to create this separate information-gathering authority.

12 comments:

Anonymous said...

You write the funnest, savviest, most cogent and interesting blog on Dodd Frank and all things Wall Street. Thanks and keep up the good work. Its my first stop in that category.

-An FDIC DRR employee

randolph said...

I agree with FDIC employee. But why no posting in two weeks time? Surely you have not run out of outrages. Anything to say about the derivatives rules now being promulgated by SEC and CFTC?
- Not a banker or a lawyer

Main Street Muse said...

1) Let's call a spade a spade and label these banks "systemically risky financial institutions." Labeling them "important" elevates them to a higher status, rather than recognizing them for the real risk they pose to our economy.

2) The "deathbed designation" seems likely to hand us a repeat of the Lehman debacle. Hope we can learn from that debacle and take actions to avoid such a catastrophe. But then again, the "best and brightest" are working hard in those systemically risky firms, not in the regulatory world....

3) Our entire system is systemically risky, and we've been dealing with (dumping the losses onto the public sector) at least since Continental Bank failed in the mid-1980s. Not clear what we gain from continuing to prop up a financial sector so rickety that the failure of one can bring down the entire economy.

Anonymous said...

main street muse -

you are right. lets just get rid of banks, keep our cash in our mattress and pay for everything in cash.

no one really needs the extension of credit really anyways.

Its quite easy to villify any industry when you blatantly ignore their benefit.

Anonymous said...

is the radio silence due to the lack of anything meaningful? Are you slowing down your postings? Busy or just on a break?

Hope to see more soon

RS Gold said...

Excellent! Usually We in no way read entire articles but the method a person composed this post is merely wonderful and also this retained my personal desire for reading through and that i liked that.

Cheap RS Gold
RS GP

Anonymous said...

This "deathbed Cheapest Diablo 3 golddesignation" would seem very likely to give people some sort of replicate in the Lehman debacle. Expect we could gain knowledge from which debacle along with consider actions to stop this kind of problem. However, your "best and brightest" work tough within individuals systemically dangerous corporations, Cheap wow golddefinitely not from the regulatory entire world

cheap windows 7 key said...

To get a corporation which has struggled with mobile for many years office 2010 activation key, Facebook Dwelling is Facebook obtaining the mobile encounter correct buy cheap windows 7 key. Within the short hands-on time I had in the occasion, it was clear this can be just the initial major step forward inside the company’s mobile obsession. It is sophisticated and modern - just what Facebook wants on tiny smartphone screens.

nana said...

Once there was a young man who came to ask Socrates how to learn philosophy. Socrates said nothing but took him along to a river. He suddenly pushed him into the river forcibly. At first the young man thought Socrates was kidding so he didn't take it to heart. But Socrates also jumped into the river and pulled his head into water desperately. At this time the young man was really scared, his instinct of living made him use all his strength lifting Socrates and climbed to the bank.


Buy Guild Wars 2 Gold
D3 Gold
read more

Cahaya Mandiri said...


It is amazing posting and incredible work, It has suitable information, I presently wanted to say that you have really so motivating and very informative post. Thanks for wonderful posting
tips cara agar cepat hamil l CARA BELAJAR BAHASA INGGRIS l the best acne treatment l how to lose weight fast easy
margahayuland l BELAJAR BISNIS ONLINE l tips cepat hamil l how to get rid of acne home remedies l
home remedies for acne l how to cure acne fast l
baju batik modern l toko sepatu online l grosir jam tangan online l
jual jam tangan l toko jam tangan murah peluang usaha online l is acne no more for you l how to get rid of acne naturally
how to clear acne l cure acne naturally
best natural remedies for acne l acne no more l tempat belajar bisnis online
peluang usaha rumahan l cara mendapatkan uang dari internet
makanan sehat agar cepat hamil l penyebab tidak bisa hamil lcara agar cepat hamil


bell said...

Effects pedalsThe great secret of power is never to will OverDrive Pedalsto do more than you can accomplishOthers Pedals

PENNY STOCK INVESTMENTS said...

Not the most happy post.