Download PDF As required by the Dodd-Frank Act, the FDIC and the Federal Reserve Board of Governors have issued a notice of proposed rulemaking (NPR) to implement the “Living Will” requirements of Section 165(d). This is intended to accomplish the admirable objective of preparing systemically important financial institutions (SIFIs) so that they can be resolved, if necessary, without creating intolerable spillovers to the rest of the financial system or costs to taxpayers. This is the main rationale for Senator Dodd’s claim that “Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written.”
The definition of so-called SIFIs is in some respects too broad and in other respects potentially too narrow. It includes all bank holding companies with total assets of above $50 billion, which surely includes many institutions that would never reasonably be considered systemically significant. It also includes all nonbank companies “predominantly engaged in financial activities” (at least 85% of consolidated revenues or assets), which leaves open the question of whether it would apply to very large financial subsidiaries of giant corporations (e.g., GE Capital Services). This definition may be too narrow to include institutions that may be of systemic importance, but that have not been chosen for enhanced supervision or required to prepare a resolution plan.
This is the main rationale for Senator Dodd’s claim that “Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written.
”The greatly abbreviated listing in the Appendix of matters that must be covered, under the NPR, gives some idea of the scale and scope of an acceptable resolution plan. The proposal estimates that the burden of preparing the initial report will be an average of 10,000 hours.
The initial submission of a plan is scheduled for some time in 2012 at the earliest, and annually thereafter, with updates whenever any of an enumerated list of possible changes takes place. The Fed and FDIC are supposed to review the plan within 60 days and require more information or reject the plan if there are deficiencies, in which case the institution has 90 days to submit a revised plan. That sets in motion an elaborate series of exchanges between the regulators and the institution in which, if the institution fails to submit a plan acceptable to the regulators within 2 years, the regulators may order divestitures of such assets or operations as they may determine necessary to facilitate an orderly resolution under the bankruptcy code.
From the perspective of achieving the stated goal of avoiding bailout situations, it may be instructive to consider how these requirements would apply to an institution that all would regard as surely significant from a systemic risk point of view: the Citi Group. At this time Citi has roughly $1.8 trillion dollars in assets, with 2,435 majority-owned subsidiaries, operating in 171 countries and participating in 550 clearing and settlement systems. It is difficult to imagine how a resolution plan could be developed in a mere ten thousand hours. It is impossible to conceive that a resolution plan would be credible and acceptable if it did not mandate a radical restructuring, simplification and scaling-down of Citi’s corporate structure. Furthermore, the agencies must be willing to follow through and force implementation. If not, the whole exercise itself may not be credible or worth the enormous expenditure of institutional and agency resources.