Systemic Risk Council
June 7, 2013
Dear Chairman Bernanke:
The Systemic Risk Council has consistently supported stronger and higher quality capital requirements for our largest banking organizations. We also support the implementation of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that gives the Federal Deposit Insurance Corporation (FDIC) the authority to resolve a large complex financial institution (LCFI) should the need arise. Capital requirements and the orderly liquidation authority are powerful tools that address key aspects of “too big to fail.”
The FDIC, working in consultation with the Federal Reserve Board and international regulators, has developed an innovative strategy for the orderly resolution of a large, internationally active bank which involves seizing control of its holding company. In the event of an LCFI failure, the FDIC would use its authority as receiver to form a bridge financial company. The holding company’s shareholders and creditors would absorb losses associated with the failure, while some of their claims would be converted to equity to recapitalize the new enterprise.
However, the success of the FDIC’s orderly liquidation authority using this “single point of entry” strategy depends on the top level holding company’s ability to absorb losses and fund recapitalization of the surviving operating entities. Currently, we have no regulation that addresses the need for these firms to hold sufficient senior debt to meet this need. We agree with the increasing number of financial regulators at the Federal Reserve and FDIC and other experts that we need to address this gap in regulatory reform.
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