This past Thursday, the FDIC closed an extended comment period on its proposed regulation and process regarding ‘resolving’ a Systemically Important Financial Institution, also known as “SIFIs”. These depository institutions are the 20 or so largest in the US and we have several that are global SIFIs, aka G-SIFI. Its proposed ‘Single Point of Entry’, describes the FDIC’s interest to take over a distressed SIFI by taking it into bankruptcy at the very top holding company level.
I very much appreciated that the FDIC had extended the comment period for an additional month, while I also was in the process of developing a comment for the Basel Committee for Banking Supervision in Europe, aka, BCBS or Basel which had requested comment on its proposed ‘Leverage Ratio’, which it had included in its “Basel III” framework. The FDIC also had had recent meetings with a special committee of private sector experts to discuss the issues regarding SIFIs also known as Too Big to Fail, including ‘resolving’ a SIFI. I had attended that meeting and audited previous meetings with this group and also was providing comment to the FDIC and that group regarding those matters.
Back to Basel and its leverage ratio, which I had opposed, the US already had had a perfectly good Leverage Ratio. The US has had a robust regulatory framework including examinations for different matters including CRA (Community Reinvestment Act), but among those for also safety and soundness, reviewing capital adequacy both from quarterly financial reports all the ‘insureds’ provide to the regulators, but also by examiners in the on-site examinations.
For SIFIs in effect these safety and soundness on-site exams have been eliminated, although the nature of examination of these large enterprises includes now the ‘stress-tests’ of their financial position including capital under distressed economy scenarios, the Capital plans and Resolutions Plans review, and light touch oversight which perhaps may include some sort of on-site examinations.
What I deplore and mention several times in my comment suggesting the better way to regulate these SIFIs is to restore effective safety and soundness examinations and regulation. Others even at the top of the financial regulators also have urged this.
Rather than seize a SIFI at the top, force it into bankruptcy, then take steps to ‘resolve’ it, conservatorship it/bridge bank it, etc, restore all the important discpline and regulatory supervision that hasn’t been done. It’s now to the point where the regulators could force a blow-up of one of these large financial institutions, with Balance Sheets either full of derivatives, or foreign or domestic banks wanting it out of the way for its franchise. Understand that the SIFIs haven’t been handled in the same way as prior to the dotcom bubble in the mid/late 1990s. I discuss ‘light touch’ oversight in the comment.
The FDIC was professional to have posted my comment (as well as a comment by Occupy the SEC and of course the lobbying groups, some other large financial institutions, and foreign parties including some of those official organs); although there were perhaps 30 or so, and mine is 29. It took 3 hours to get the cloud to take my email with my comment attached, as the same as in the past, I had to deal with problems with harassment in my internet services that are cloud based. That evening I endured around 3 hours of cloud goblins punishing me and delaying my post into 21March.
http://www.fdic.gov/regulations/laws/federal/2013/2013-single-point-entry-c_29.pdf is the link or http://www.fdic.gov/regulations/laws/federal/2013/2013-single-point-entry.html . My comment letter is 29.
Admittedly I don’t agree with resolving a SIFI, nor do I think that if a SIFI were in distress, that it can’t recap, rights offer, shrink its balance sheet, roll off derivatives exposures and shed some ‘matched-book’ etc, without lancing it at the top and putting it through bankruptcy. The foreigns don’t do bankruptcy and that works against our assets in other sovereigns.
See my Transactions/Projects List among these blogs on apsoras1, and find the number of recaps on which I’d worked for distressed financial institutions. Granted none were even as big as the Bank of New England failure, however, I suppose like Rome, SIFIs weren’t built to their size in a day, and the foreigns have no interest in skinnying or resovling their ‘SIFIs’ and G-SIFIs. We’ve done enough harm to ourselves because of multilateralism and flawed policy proceeding from that,which I also address in my Comment. I suggested the FDIC could have been at the table of parties making comment about the impact of those policies on the banks, and also making comment to the FASB against IFRS, or to the SEC about the Net Capital Rule, even though those aren’t their wards, or about the mergers all along the way of whatever the SIFIs wanted to buy, while there sort of shopping them the targets after other regulators failed to do their jobs right. WAMU and JPMorgan Chase buying it are a good example.
Email: Comments@FDIC.gov.Include ‘‘Single Point of Entry Strategy’’ in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary,
Federal Deposit Insurance Corporation,
550 17thStreet NW., Washington, DC 20429.
RE: Single Point of Entry /77614-76624 Federal Register / Vol. 78, No. 243 / Wednesday, December 18, 2013 / Notices
Guide:Abstract p1; Opening Remarks p2; Preface p2; NPR Comment p10; SRAC Meetings Comment p43; End Comments, Observations related to SRAC meeting discussions and the sector, issues p48; NOTES p51; Appendix p62.
This is a comment to contribute to the Public Due Process requested in FEDERAL DEPOSIT INSURANCE CORPORATION’s (“FDIC”)Notice for Proposed Regulation (“NPR”) related to as characterized in the Dodd Frank Act of 2010 “DFA”, Resolution of Systemically Important Financial Institutions “SIFIs”: the Single Point of Entry StrategyThe following observations are about last years’ FDIC discussion with SRAC about resolving Systemically Important Financial Institutions (“SIFI”) and some discussion about this year’s topic, Single Point of Entry (“SPoE”) in the US and abroad while resolving or “unwinding” a SIFI. Whereas I haven’t supported maintaining the ability for these largest financial institutionsto abuse power, and with that power to grow to their size, and therein to many observers and the easily manipulated public, that ability to abuse power is obscured by their size, and thus Too Big To Fail and punishing these SIFIs distracts from correcting abuse of power.Thus I do not support the FDIC’s interest to resolve SIFIs. If ever, this perhaps would be a path, but with significant constraints against foreign buyers/investors and commercial/industrial corporate buyers/investors participating in the later stages.
In general, I have not supported the effort to ‘resolve’ SIFIs, nor destabilize them.Nor have I supportedfailing to regulate them effectively in the manner former to regulatory acceptance for financial innovation. This de facto regulatory framework of allowing the largest financial institutions (which often also are “ISDA” members – International Swaps and Derivatives Association) to engage in the unsafe and unsound practices and products ofwriting and trading derivatives and Over-the-counter (OTC) contracts without restraint,has existed since before the Gramm, Leach, Bliley legislation in 1999 and in 2000, the Commodity Futures Modernization Act, enabling OTC contracts and derivatives to trade without any regulatory framework at all in existenceat that time and for a number of years after that passage of that law.
Regulatory, Congressional and Executive Branch support of, and deference to (by not regulating/restraining or disciplining for unsafe and unsound banking products and practices) financial innovation has disserved the US and our Insured Depository Institutions IDIs of all sizes. Nor has support by the Fed of multilateralism at all served the US and with support for multilateralism, in time also came ‘light touch’ ‘regulation. Moreover, the belief mentionedin this NPR by the FDIC of subjecting a SIFI to “Title II” resolution to achieve the furtheringof its mission to promote market discipline and maintain financial stability contradicts all the reasons all along – and among these – that it has allowed the largest favored institutions to merge, and enabled the US retail and larger corporate customers andmunicipalities to enjoy stable banking relationships.
Furthermore, the FDIC and Fed both in law and representationto the public, identify themselves as regulators and/or supervisors. Neither however has administered nor enforced effective regulatory discipline all along for perhaps a decade against these largest financial institutions.Additionally, the Fed has thwarted or politically co-opted the FDIC from properly administering enforcement against the prolific derivatives and OTC contract writing. As has been their practice in the past to administer full safety and sound examinations on site by examiners, score the banks not only using off-site quarterly financial filings, but also based on what the examiners found in their annual safety and soundness examinations of IDIs of all sizes, andadministering enforcement if and when in breachof regulation including operating insafe and sound condition, such more demonstrates their roles as effective regulators, and more maintains the financial stability and promotes market discipline, because supporting, permitting and giving kid glove treatment to financial innovation is neither safe, nor sound,nor promoting market discipline or financial stability.Because this NPR proposes to seize and expropriate stakeholders’ means and resources to resolve a SIFI, resolution as proposed has appearances of Marxist Vandalism.