 |
| Alan
Greenspan |
The biggest shortfall of the Dodd-Frank Act is its inability to
remove incentives that encourage banks to misuse savings under
an understanding that they are too big to fail, Former Federal
Reserve Chairman Alan Greenspan has claimed.
Title II of Dodd-Frank addresses the
risks of too-big-to-fail and intends to correct for them
through the orderly liquidation authority (OLA) and resolution
planning for systemically important financial institutions
(sifis).
It remains unclear, however, whether
the OLA and resolution planning will prevent bank savings from
being misused as a result of bad incentives created by the 2008
troubled asset relief program.
Speaking at the Securities Industry
and Financial Markets Association's annual meeting on Tuesday,
the former banking regulator said it would be best for
distressed banks to go through a standard Chapter 11 plan and
liquidate.
"The whole financial system
essentially works best when it is able to move savings into
profitable investment," he said. "If, for example, there are
many institutions which are labeled effectively
too-big-to-fail, more likely than not they may be misusing the
savings of the society."
"Ordinarily, if they were not too
big to fail they would go through Chapter 11 and get
restructured and the whole system would start again," said
Greenspan.
As it stands, the Federal Deposit
Insurance Corporation (FDIC) can be appointed a receiver of
distressed member banks under the Federal Deposit Insurance Act
of 1950. The OLA creates a similar process for sifis in which
the Secretary of the Treasury appoints the FDIC as a receiver
for the relevant institution's top holding company. The FDIC is
then to sell all the assets to a bridge holding company. The
receivership retains all liabilities and the FDIC receives all
equity interests.
The FDIC plans for such a bridge
company to receive private financing that can be guaranteed by
an orderly liquidation fund backed by the Treasury. The role of
the FDIC as a guarantor of debt financing for distressed sifis
has raised concerns too-big-to-fail still exists.
An assessment by Federal Financial Analytics
published on October 22 sought to answer whether US sifis are
still too-big-to-fail. The paper concluded US bank holding
companies and other financial services firms, regardless of
size or the nature of their operations, can no longer be
rescued at long-term cost to the federal government or
otherwise supported in ways that undermine market
discipline.
Karen Shaw Petrou, managing partner
of Federal Financial Analytics, said the assessment targeted
the biggest confliction in financial regulation - the premises
behind capital requirements and other stability provisions and
the idea that banks are too big to fail.
"Right now, we're regulating
financial services institutions as if they're too big to fail
and just in case they are not, which is the worst of all
possible worlds," Petrou said
"The orderly liquidation authority
is incomplete and untested, but when you look at the law, it is
very straight forward - it says tax payers may not bail-out
banks," Petrou said. "Institutions are to be resolved under
Chapter 11, except in the event of systemic risk which must be
found under a series of very stringent conditions."
The OLA bridge company strategy
would consider liquidation plans, also called living wills, to
guide the FDIC under such a scenario. The deadline for sifis to
submit plans was October 1. The publicly disclosed sections of
liquidation plans are available on the
FDIC's website.
See
also
Banking sector reform: a definitive guide to the
latest developments
http://www.iflr.com/Article/3107360/Banking-sector-reform-a-definitive-guide-to-the-latest.html
Why
Dodd-Frank extraterritoriality is fundamentally
flawed
http://www.iflr.com/Article/3084114/Why-Dodd-Frank-extraterritoriality-is-fundamentally-flawed.html
Derivative disclosure increases under Chapter
11
http://www.iflr.com/Article/2828932/Derivative-disclosure-increases-under-Chapter-11.html
ResCap's complex Dip financing
http://www.iflr.com/Article/3033158/ResCaps-complex-Dip-financing.html