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
regulators role as receiver of failed non-bank
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.
speech at this months 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 companys assets, allowing subsidiaries to keep
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,
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 plans
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.