recent speech, the acting chairman of the Federal Deposit
Insurance Corporation (FDIC), Martin J. Gruenberg, outlined the
agencys strategy for orderly liquidation
FDIC will place only the top-tier holding company of a
distressed institution whose impending default would damage US
financial stability into an OLA receivership.
financial institutions and their creditors and other
stakeholders will want to consider closely the impact of the
proposed resolution approach as it differs from the traditional
US bank receivership process.
traditional bank receivership, the FDIC has focused on
minimising the costs of the receivership for the FDICs
Deposit Insurance Fund. The resolution process has as its
objective minimising the systemic effects of the failure of a
significant and complex financial institution on the financial
system. The FDIC as the receiver may sell the assets of the
failed institution to a bridge holding company.
part of this resolution process, the FDIC may wipe out the
companys shareholders and turn unsecured creditors (both
senior and junior) into shareholders, subordinated debt
holders, and unsecured creditors of a new bridge holding
company. Unsecured creditors and the subordinated debt holders
will hold claims against the receivership (but not against the
bridge company). The assets of the receivership will be the
equity in the bridge company, and the FDIC will pay a portion
of the claims with this stock.
bridge company is capitalised solely by the conversion of
unsecured debt into equity. Now well-capitalised and supported
by guarantees, the bridge company should, in the FDICs
view, be able to obtain new private financing, which it can
downstream into any troubled subsidiaries.
not clear how the bridge company will be able to obtain new
financing given the circumstances that likely will surround a
resolution process. In addition, the bridge company is a
refinanced and nominally recapitalised version of the failed
institution, with some of the same stakeholders, albeit with
different stakes. Will it present an attractive investment
opportunity? Historically, the FDIC has used the bridge company
in bank receiverships to facilitate the sale of good assets to
a new buyer and the liquidation of bad assets.
speech also suggests that much of the unsecured debt of a
holding company that will be subject to the orderly liquidation
process in the US has become or will be treated as bail-in
debt. Last year, we witnessed the effect that bail-in fears had
on the European market for senior unsecured debt of financial
institutions. This new announcement would seem to raise many of
the same concerns for holders of US bank debt.