FDIC’s non-bank liquidation strategy: Chairman Gruenberg explains what you need to know

Author: | Published: 24 May 2012
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Creditors and counterparties to non-bank systemically important financial institutions (SIFIs) will always be subject to potential losses when the US Federal Deposit Insurance Corporation (FDIC) has to step in as receiver to insolvent SIFIs, FDIC Chairman Martin Gruenberg has said.

The FDIC finalised a rule last year clarifying application of the orderly liquidation authority as stipulated under Title II of the Dodd-Frank Act. It followed establishment of the Office of Complex Financial Institutions (OCFI) to support the regulator’s role as receiver of failed non-bank SIFIs.

In a bid to prevent against any taxpayer fund losses, the FDIC also finalised a rule last month that limits the obligation the regulator can incur in a non-bank SIFI to 10 percent of the total consolidated assets and 90 percent of the fair value of the total consolidated assets of the company available for repayment.

In a speech at this month’s 2012 American Securitization Forum Annual Meeting Gruenberg made clear the FDIC would only be acting as a resolution authority and not in any capacity analogous to a deposit insurer. ”This is a central feature of the new resolution authority and is designed to ensure that there is market accountability,” he said.

The FDIC would also only place the parent holding company into receivership, when it exercises its orderly liquidation authority over non-bank SIFIs, he said.

Large financial companies conduct business through multiple subsidiary legal entities with many interconnections owned by a parent holding company. “The resolution of the individual subsidiaries of the financial company would increase the likelihood of disruption and loss of franchise value by disrupting the interrelationships among the subsidiary companies,” Gruenberg said.

Upon parent company receivership the FDIC plans to create a bridge financial company for the holding of the troubled company’s assets, allowing subsidiaries to keep doing business.

As these subsidiaries will remain open and operating as going concern counterparties, the FDIC expects the qualified financial contracts will continue to function normally as the termination and liquidation of such contracts will be minimal, Gruenberg said.

The FDIC plans to finance the new bridge company through subordinated debt and senior unsecured debt claims. Debt holders are then to receive convertible subordinated debt in the new company. Equity holders are not expected to receive any payment on their claims.

Under the Dodd-Frank Act, companies with assets over $250 billion will have to submit their resolution plans, or living wills, at the end of July. Gruenberg said company resolution plan’s key value would be to provide additional support and information relating to the internal plans the FDIC is developing to execute its Title II authorities.