November 15, 2012
Remarks at the Clearing House's Second Annual Business Meeting and Conference, New York City
As prepared for delivery.
It is a pleasure to have the opportunity to speak here today. I am
glad to see the progress our city and region have made recovering from
Sandy, but obviously significant challenges remain.
I am going to focus my remarks today on what is popularly known as
the “too big to fail” (TBTF) problem. In particular, should society
tolerate a financial system in which certain financial institutions are
deemed to be too big to fail? And, if not, then what should we do about
it?
The answer to the first question is clearly “no.” We cannot tolerate a
financial system in which some firms are too big to fail—at least not
ones that operate in any form other than that of a very tightly
regulated utility.
The second question is the more interesting one. Is the current
approach of the official sector to ending TBTF the right one? I’d
characterize this approach as reducing the incentives for firms to
operate with a large systemic footprint, reducing the likelihood of them
failing, and lowering the cost to society when they do fail. Or would
it be better to take the more direct, but less nuanced approach
advocated by some and simply break up the most systemically important
firms into smaller or simpler pieces in the hope that what emerges is no
longer systemic and too big to fail?
1
As I will explain tonight, I believe we should continue to press
forward on the first path. But, if we fail to reach our destination by
this route, then a blunter approach may yet prove necessary. As always,
my views may not necessarily reflect those of the Federal Reserve
System.
What Is the Too-Big-to-Fail Problem?The root
cause of “too big to fail’ is the fact that in our financial system as
it exists today, the failure of large complex financial firms generate
large, undesirable externalities. These include disruption of the
stability of the financial system and its ability to provide credit and
other essential financial services to households and businesses. When
this happens, not only is the financial sector disrupted, but its
troubles cascade over into the real economy.
There are negative externalities associated with the failure of any
financial firm, but these are disproportionately high in the case of
large, complex and interconnected firms. Although the moniker is “too
big to fail,” the magnitude of these externalities does not depend
simply on size. The size of the externalities also depends on the
particular mix of business activities and the degree of
interconnectedness with the rest of the financial industry. One
important element is the importance of the services the firm provides to
the broader financial system and the economy and the ease with which
customers can move their business to other providers. Another is the
extent to which the firm’s structure and activities create the potential
for contagion—that is, direct losses for counterparties, fire sales of
assets held by other leveraged financial institutions, or loss of
confidence that might precipitate runs on other firms with similar
business models.
The presence of large negative externalities creates a dilemma for
policymakers when such firms are in danger of failing, particularly if
the wider financial system is also under stress at the same moment. At
that point in time, the expected costs to society of failure are very
large compared to the short-run costs from providing the extraordinary
liquidity support, capital or other emergency assistance necessary to
prevent catastrophic failure.
The market's belief that a TBTF firm is more likely to be rescued in
the event of distress than other firms weakens the degree of market
discipline exerted by capital providers and counterparties. This reduces
the firm's cost of funds and incents the firm to take more risk than
would be the case if there were no prospect of rescue and funding costs
were higher.
The fact that firms deemed by the market to be TBTF enjoy an
artificial subsidy in the form of lower funding costs distorts
competition to the detriment of smaller, less complex firms. This
advantage, in turn, creates an unfortunate incentive for firms to get
even larger and more complex. The funding benefit of being seen to be
TBTF causes the financial system to become artificially skewed toward
larger and more complex firms—in ways that are unrelated to true
economies of scale and scope.
Now to be clear, I don't believe that firms necessarily deliberately
set out to become TBTF. Nor do I think that TBTF was the main cause of
the breakdown in market discipline that preceded the financial crisis.
Many factors were at work, including the failure to grasp the riskiness
of new types of credit products and business models, and principal-agent
problems such as the “trader’s put.” But I do think TBTF contributed to
the underpricing of risk in the system and did create a bad set of
incentives, and if not addressed comprehensively, would likely be an
even larger problem in the future.
So How Did the Problem Become So Serious? The
TBTF problem is not new. For example, the FDIC (Federal Deposit
Insurance Corporation) and other federal regulatory agencies intervened
to prevent the abrupt failure of Continental Illinois, then the seventh
largest bank in the United States, in the 1980s. Had Continental
Illinois been allowed to fail without any intervention, the comptroller
of the currency later testified, “we could very well have seen a
national, if not an international, financial crisis the dimensions of
which were difficult to imagine.”
2
The comptroller went on to declare that the largest 11 national, commercial banks were too big to fail.
But the problem has become more significant since that time for
several reasons. First, the biggest financial institutions have become
much larger, both in absolute terms and relative to the overall size of
the banking system. This reflects many factors including the end of
prohibitions on interstate banking, the repeal of the Glass-Steagall Act
restrictions separating investment from commercial banking, the rapid
growth of the capital markets, and the globalization of the economy—all
of which created intense competitive pressures to expand in order to
gain economies of scale and scope.
In commercial banking, consolidation occurred at a rapid pace. For
example, Bank of America was the outgrowth of over 160 different
mergers, which pushed up the size of the original acquirer from $23
billion of assets in 1980 to $2.2 trillion today. In the securities
industry, some partnerships became public companies, in part, so that
they could more easily obtain the capital needed to expand rapidly. For
example, when Goldman Sachs went public in 1999, it had about 15,000
employees and $250 billion of assets. Just eight years later, the firm
had expanded to 35,000 employees and $1.1 trillion of assets.
In the mid-1990s, the top five banks in the United States had total
assets of $1 trillion or about 14 percent of gross domestic product
(GDP). The top securities firms had total assets of $718 billion, or
about 9 percent of GDP. By the end of 2007, the top five banks had
assets of $6.8 trillion or 49 percent of GDP. Similarly, the top
securities firms accounted for $3.8 trillion, or about 27 percent of
GDP. In addition, the firms’ off-balance-sheet exposures rose sharply.
Second, the complexity and interconnectedness of the largest
financial firms increased markedly. Factors behind this include the
adoption of a universal banking model by some commercial bank holding
companies and the rapid growth of trading businesses, especially the
over the counter (OTC) derivatives market. In the early 1980s, there
were no true U.S. “universal banks” that combined traditional commercial
banking with capital markets and underwriting activities. By 2007,
there were several operating in the United States, including Citigroup,
J.P. Morgan, UBS, Credit Suisse and Deutsche Bank. Also, the OTC
derivatives business in foreign exchange, interest rate swaps and credit
default swaps had exploded from its start in the early 1980s. The total
notional value of the OTC derivatives outstanding for the five largest
banks and securities firms currently totals about $200 trillion.
During this period, there was inadequate attention to the risks that
were building up in the system. The regulatory and supervisory framework
did not keep up with the changes in size, complexity,
interconnectedness and globalization that created growing systemic risk
externalities and widened the wedge between private and social costs in
the event of failure.
Let me mention just a few of the issues:
- Capital regulation was lax both in terms of the amount of capital
required and the quality of that capital. As a result, many banks did
not have the capacity to absorb large shocks and retain access to
wholesale funding.
- The oversight of the largest securities firms was particularly
deficient in terms of ensuring that these firms had sufficient private
resources to deal with shocks. The industry was also particularly
exposed because in the United States, there was (and remains) no lender
of last resort backstop for the securities industry except in extremis.3
- Although global integration brought with it a number of benefits,
regulatory coordination did not keep pace with the globalization of
financial firms and markets. This allowed the potential magnitude of the
negative externalities associated with the failure of globally active
firms to expand considerably.
- Policymakers allowed market structures, particularly in wholesale
funding markets, to evolve in directions that were efficient from a
private perspective in normal times, but amplified run dynamics and
therefore externalities in times of stress. Examples include the growth
in triparty repo activities and the reliance of many large financial
institutions on funding from money market mutual funds, as well as many
other elements of the shadow banking system.
The TBTF problem was further aggravated by the financial crisis and
the policy response. Faced with systemwide stress, the Federal Reserve,
with the support of the U.S. Treasury, intervened to prevent the
disorderly failure of Bear Stearns, a firm that would not have been high
on the list of TBTF firms a few years earlier.
Meanwhile, the failure of Lehman Brothers demonstrated that the cost
to society of the uncontrolled failure of a TBTF firm in a period of
generalized stress was considerably greater than anticipated. Following
the bankruptcy of Lehman, contagion spread by many channels, including
prime brokerage, OTC derivatives positions, money market mutual funds,
tri-party repo and wholesale funding markets. The loss in confidence
disrupted the flow of credit throughout the global financial system,
generating a global economic downturn and the worst contraction in the
United States since the Great Depression.
Recognition of the costs generated by the Lehman failure led to
extraordinary interventions to prevent further catastrophic failures.
These included the rescue of AIG, the FDIC’s TLGP program, the
ring-fence of Citigroup’s poorer quality assets, and the TARP injection
of capital into the largest U.S. financial institutions. Because this
solidified in investors’ minds that TBTF firms—after the Lehman
debacle—would be protected, this worsened the TBTF problem.
The problem was exacerbated during the crisis by the acquisition of
weakened firms by stronger firms, a development that was actively
promoted by policymakers in a bid to avoid or temper the consequences of
their failure. J.P. Morgan absorbed Bear Stearns and Washington Mutual
and its assets grew from $1.5 trillion in 2007 to $2.3 trillion today;
Wells Fargo purchased Wachovia and its assets increased from $575
billion in 2007 to $1.3 trillion today; and Bank of America purchased
Countrywide and Merrill Lynch, increasing its assets from $1.7 trillion
in 2007 to $2.2 trillion today. This, of course, made the surviving
firms even bigger and more complex.
When the smoke had cleared, the situation was clearly untenable. The
experience of the crisis increased the advantage from being perceived as
TBTF, and, thus, strengthened the incentives to become bigger, more
complex, and interconnected.
The Dodd Frank Act (DFA) set out to end TBTF. One means was by
eliminating the Federal Reserve’s discretion to provide emergency
financial support through a program open only to a single financial
institution, and, in general, raising the bar for broader-based
emergency interventions under section 13.3 of the Federal Reserve Act.
But, as the DFA recognized, simply tying the Fed’s hands on
intervention is insufficient. It does not reduce the cost to society
from the failure of a large and complex firm. In order for the
non-intervention strategy to be both fully credible and consistent with
the public interest, we need to tackle the underlying externalities and
incentive problems that give rise to TBTF in the first place.
Tackling Too Big to Fail As I see it, solving
the TBTF problem requires working on a number of different margins.
These include measures that are firm-specific and those that address the
structure of the financial system more broadly.
One set of measures works to reduce the incentives for excessive
risk-taking and to lower the probability that large financial firms fail
or come close to failure. Another set lessens the disruption to the
financial system and hence the cost their failure imposes on the broader
economy and society as a whole. Along with measures that penalize
characteristics associated with the negative externalities from failure,
these changes work against the incentive to be too big to fail.
Policy measures that alter incentives and reduce the probability of distress
A number of steps have already been taken that reduce the probability
of failure. For example, there has already been considerable progress
in forcing firms to bolster their capital and liquidity resources. On
the capital side, consistent with the Dodd-Frank Act, Basel III
significantly raises the quantity and quality of capital required of
internationally active bank holding companies. This ensures that the
firm’s shareholders will bear all the firm’s losses across a much wider
range of scenarios than before. This should strengthen market
discipline. Meanwhile, to the extent that some of the specific
activities that generate significant externalities are now subject to
higher capital charges, this should cause banks to alter their business
activities in ways that reduce both the likelihood and social cost of
their failure.
Moreover, the new Basel regime explicitly adjusts capital
requirements upward based on size, complexity, interconnectedness,
global exposure and substitutability—attributes that are proxies for the
negative externalities generated by failure. If a bank is deemed a
global systemic financial institution or G-SIFI, then it will have to
hold a greater amount of capital relative to its risk-weighted assets
compared to a less systemic institution.
4
The notion behind the SIFI surcharge is a simple one. The cost to
society from the failure of a large, complex firm is proportionally
considerably higher than the cost to society of the failure of a
non-systemic firm. As a result the capital buffer for the more systemic
firm should be higher so that its expected probability of failure will
be lower than for the less systemic firm.
The SIFI surcharge acts as a penalty for size and complexity, leaning
against the funding cost advantage a firm may have because it is
perceived to be TBTF. This helps level the playing field for smaller
firms and reduces the incentive to seek to become TBTF in the first
place.
Domestically, we have adopted a more forward-looking approach to
capital through the use of stress tests, in particular the annual
Comprehensive Capital Assessment Review (CCAR) program. By promoting
transparency, CCAR also strengthens market discipline.
On the liquidity front, the largest, most systemically important bank
holding companies will be required to hold a 30-day liquidity
buffer—the so-called liquidity coverage ratio or LCR. The purpose of the
LCR is to ensure that such a bank will have sufficient liquid resources
so if it were to encounter business difficulties and temporarily lose
access to market funding, it would still have some time to address its
underlying problems. With a liquidity buffer, banks will not immediately
be forced to sell illiquid assets during times of stress. This should
enhance their stability, and provide some protection against the fire
sale externalities we saw during the crisis: forced asset sales, falling
asset prices, leading to rising capital losses at other firms that led,
in turn, to further funding difficulties, asset sales and so on.
On the supervisory side, firms are now increasingly being evaluated
on a cross-industry basis in order to identify best practices and to
identify laggards that need to upgrade areas such as MIS, governance,
model validation, and risk management practices.
Activity restrictions are another potential means to reduce the risk
of failure. The biggest initiative in this area is the Volcker Rule. By
limiting proprietary trading activities, the Volcker Rules seeks to
reduce trading risk and the likelihood of failure.
In addition, the Financial Stability Oversight Council (FSOC) is in
the process of identifying those non-bank financial firms that are
systemically important. These firms will be subject to tougher
prudential standards and supervisory oversight by the Federal Reserve.
Some argue that this designation process merely creates more TBTF
firms. I see it differently. The system risk externalities do not depend
on whether we label them systemic or not. If these risks are present,
then we should face up to the issue with tougher standards and enhanced
supervisory oversight rather than leave the issue unaddressed. This has
to be a superior approach relative to pretending these firms could not
be TBTF and the problem doesn’t exist.
Policy measures to reduce the adverse systemic consequences from failure
Because no plausible level of capital and liquidity standards will be
sufficient to reduce the probability of failure to zero, it also makes
sense to work on the other major margin—to reduce the cost of the
failure of a large, complex financial firm. We can do this by making
changes so that such failures are less likely to impair the functioning
of the broader financial system. In this area, although many initiatives
are in train, I would conclude that we are still very far from where we
need to be.
One simple but meaningful step that already has been enacted is to
put a brake on the ability of the largest and most complex firms to
become even larger and more complex. To this end, the Dodd-Frank Act
adds “the risk to stability of the U.S. banking or financial system” as
an additional factor to be considered in evaluating a proposed merger or
acquisition under the Bank Merger Act and the Bank Holding Company Act.
As Governor Daniel Tarullo discussed in a recent speech, there is not a
hard and fast rule to be applied here. But his view, which I share, is
that there would be a “a strong, though not irrebuttable, presumption of
denial [of a merger or acquisition] by any firm that falls in the
higher end of the list of global systemically important banks…”
5,
6
Another step for dealing with the firms that might be viewed by some
as already TBTF is to understand better the interconnections and
pathways through which the distress or failure of one firm impairs the
larger system and causes harm to society. We have made progress through
the supervisory process in mapping out critical activities performed by
firms. Also, we have identified a number of areas, such as collateral
management, where better practices could both improve the safety and
soundness of the individual firm and reduce the negative externalities
generated by a firm’s failure.
Work is also underway to evaluate what changes would be required to
make the future bankruptcy of large complex firms less disruptive, while
also developing an alternative means for the orderly resolution of such
firms outside the normal bankruptcy process.
The costs to society of large complex financial firms failing can be
reduced at least to some degree by having firms, working in conjunction
with their regulators, “pre-plan” their own failure through the
so-called “living will” process. The largest and most systemically
important banks submitted their “living wills” to the Federal Reserve
and the FDIC this summer. We have reviewed the first iterations of their
plans and are currently drafting feedback for the firms to incorporate
in their next submissions. Through such “living wills,” regulators are
gaining a better understanding of the impediments to an orderly
bankruptcy. This is the necessary first phase in the process of
determining how to ameliorate these impediments over time and then doing
so.
In my view, this initial exercise has confirmed that we are a long
way from the desired situation in which large complex firms could be
allowed to go bankrupt without major disruptions to the financial system
and large costs to society. Significant changes in structure and
organization will ultimately be required for this to be achieved.
However, the “living will” exercise is an iterative process, and we have
only taken the first step in a long journey.
The second way to potentially minimize the negative externalities
from a firm’s failure would be to avoid a bankruptcy proceeding
altogether and instead resolve the firm under the Dodd-Frank Act’s Title
II orderly liquidation
7 authority.
8
The “single point of entry” model has much promise, but much
remains to be done before it could be implemented with confidence for a
globally active firm. Title II authority is U.S. law. Subsidiaries and
affiliates chartered in other countries could be wound down under the
bankruptcy laws of those countries, if authorities there did not have
full confidence that local interests would be protected. Certain Title
II measures including the one-day stay provision with respect to OTC
derivatives and other qualified financial contracts may not apply
through the force of law outside the United States, making orderly
resolution difficult.
The other essential dimension of solving TBTF is to make the
financial system more robust—addressing structural vulnerabilities that
tend to amplify shocks rather than absorb them. If the financial system
can be made more resilient, it will be better positioned to withstand
the failure of a large and complex firm and continue to provide
essential financial services to the real economy.
I would highlight three areas of work that are critical to solving
the TBTF problem. First, regulators and supervisors are pushing for
changes in wholesale funding markets, a source of particular
vulnerability during the crisis. This includes reforms to tri-party
repo, which are underway, and necessary reforms to the money market
mutual fund industry, which are being evaluated by the Securities and
Exchange Commission (SEC) and the Financial Stability Oversight Council.
Second, the financial market infrastructures are being strengthened
to make them more robust to the failure of individual firms. The
Committee on Payments and Settlement Systems and the International
Organization of Securities Commissions (IOSCO) have published a set of
standards for financial market infrastructures called “Principles for
Financial Market Infrastructures” that will serve as minimum standards
globally.
Finally, the OTC derivatives market is being reformed with the aim of
reducing bilateral exposures between firms and, thus, the systemic
impact from any one firm failing. All standardized OTC derivatives in
the interest rate, credit default, and equities markets will soon have
to be centrally cleared through central counterparties (CCPs). The
clearing of standardized derivatives trades through CCPs should reduce
risk in the overall financial system by facilitating the netting down of
OTC derivative exposures. Such trades will also have to be reported to
trade repositories and information about the trades will be made
available on a post-trade basis. This should make the OTC derivatives
market more transparent and, thus, reduce the risk of contagion.
The Way Forward We have made some progress on
the TBTF problem, particularly in reducing the likelihood that a large
complex firm will reach the point of distress at which society faces
serious costs. But we have a considerable ways to go to finish the job
and reduce to tolerable levels the social costs associated with such
failures.
Further international coordination is almost certainly going to be
necessary to ensure that bankruptcy regimes interact in ways that
minimize negative externalities. At home we also need to ensure that
different authorities and resolution regimes operate in a mutually
consistent manner. In particular, we may need to revisit the SIPC regime
that governs securities firms in bankruptcy. At present, the bankruptcy
of a securities firm is very disruptive because the claims of all
counterparties are typically frozen for a considerable period and the
value of these claims is not easy to ascertain or monetize quickly.
As I have argued above, we shouldn’t focus on solving TBTF
exclusively at the level of the individual firm. We need significant
changes in market structures and practices as well in order to have a
financial system in which the key players can fail without big social
costs.
We also must continue to ask ourselves the question of whether the
steps in train go far enough. For example, one could make a good case
that the capital surcharge for systemically important firms should be
higher than that contemplated by the Basel Committee. Of course, such a
judgment depends on how much other policies succeed in reducing the
negative externalities their failure would generate.
Critics of our approach believe it would be better to just break up
firms deemed TBTF now—perhaps through legislation requiring the
separation of retail banking and capital markets activities or by
imposing size restrictions that require firms to shrink dramatically
from their current scale. My own view is that while this could yet prove
necessary, it is premature to give up on the current approach: changing
the incentives facing large and complex firms, forcing them to become
more resilient, and making the financial system more robust to their
failure.
In my opinion, there are shortcomings to reimposing
Glass-Steagall-type activity restrictions or strict size limits. With
respect to Glass-Steagall, it is not obvious to me that the pairing of
securities and banking businesses was an important causal element behind
the crisis. In fact, independent investment banks were much more
vulnerable during 2008 than the universal banking firms which conducted
both banking and securities activities. More important is to address the
well-known sources of instability in wholesale funding markets and give
careful consideration to whether there should be a more robust lender
of last resort regime for securities activities.
With respect to size limitations, it is important to recognize that a
new and much reduced size threshold could sacrifice socially useful
economies of scale and scope benefits. And it could do this without
actually solving the problem of system risk externalities that aren’t
related to balance sheet size.
Evaluating the socially optimal size, scope and organizational
structure of financial firms is a complicated business, and so is
establishing a viable transition path to a system of much smaller firms.
It would be helpful in this regard if advocates of break-up solutions
would put a bit more flesh on the bones and develop detailed proposals
that address essential questions of how such downsizing or functional
separation would be accomplished, and what benefits and costs could be
expected.
Such an analysis should answer several questions: How would you force
divestiture (in good times and bad)? Should firms be split up by
activity or reduced pro-rata in size? How much would they have to be
shrunk in order for the externalities of failure to no longer create
TBTF problems? How would global trading and investment banking services
and network-type activities be supported? Should some activities be
retained in natural monopoly form, but subject to utility type
regulation? How costly would it be to replicate support services or to
manage liquidity and capital locally? Are there ways of designing size
limits that cannot be arbitraged by banks via off-balance-sheet
structures and other forms of financial innovation? So far, advocacy for
the break-up path has been strong, but without the detail to assess
whether this is indeed superior to the course we are currently
following. But, I’m open-minded.
It is important to recognize that any credible approach to addressing
the TBTF problem, including the one we are pursuing today, necessarily
implies changes to the structure and business mix of financial firms and
financial markets. Moreover, it is important to stress that not all of
these adjustments will be in the private interests of these firms, and
some will result in changes to the price and volume of certain financial
services. These are intended consequences, not unintended consequences.
Too big to fail is an unacceptable regime. The good news is there are
many efforts underway to address this problem. The bad news is that
some of these efforts are just in their nascent stages. It is important
that as the crisis recedes in memory, that these efforts not flag—this
is a project that needs to be seen to a successful conclusion and then
sustained on a permanent basis.
Thank you for your attention, I would be happy to take a few questions.
1 This would presumably require legislation.
2 Conover, C.T. 1984. “Testimony: Inquiry
Into the Continental Illinois Corp. and Continental Illinois National
Bank.” Hearings Before the Subcommittee on Financial Institutions
Supervision, Regulation, and Insurance of the Committee on Banking,
Finance and Urban Affairs, U.S. House of Representatives, 98th Cong.,
2nd Session, September 18, 19 and October 4: 172-391. P. 288
3 Under Section 13(3) of the Federal
Reserve Act, the Federal Reserve is authorized to lend to individuals,
corporations and partnerships. But this may occur only if a super
majority of the Board of Governors of the Federal Reserve System has
determined that circumstances are “unusual and exigent.” Subsequently,
the Dodd-Frank Act further constrained this authority by prohibiting its
use to rescue an individual company from bankruptcy.
4 Earlier this month, the Financial
Stability Board published a list of 28 global systemically important
banks or G-SIBs that will be subject to capital surcharges. The firms
were arrayed in four buckets, with an increasing capital surcharge as a
percent of risk-weighted assets imposed as one ascended upward to the
higher buckets.
5 See Governor Daniel K. Tarullo,
“Financial Stability Regulation,” October 10, 2012. Mr Tarullo added
that “I would not apply the presumption in the case of certain de
minimis acquisitions or in cases where asset dispositions were judged to
offset any increase in systemic risk from the proposed new acquisiton."
6 Earlier this year, the Board of
Governors issued an order approving Capital One Financial Corporation's
acquisition of a federal savings bank, ING Bank. In that order, the
Board set forth two principles that are relevant to this particular
issue. First, the Board stated that it would generally find a
significant adverse effect if the failure of the firm resulting from a
merger or acquisition "would likely impair financial intermediation or
financial market functioning so as to inflict material damage on the
broader economy." Second, the Board observed that there are some small
acquisitions or mergers that would not raise a financial stability
concern, such as “a proposal that involves an acquisition of less than
$2 billion in assets, [or] results in a firm with less than $25 billion
in total assets . . . . “
7 The FDIC's "single point of entry"
framework for implementing this authority envisages establishing a
bridge company into which all the operating subsidiaries of the parent
company would be transferred. The bridge company would be recapitalized
by converting all or some of the parent company’s subordinated and
senior unsecured debt into fresh equity in the bridge company. The
parent company would be allowed to fail. The transfer of the operating
subsidiaries to the bridge company would allow critical operations to
continue and provide time for the FDIC to move the systemically
important operations back into private hands.
8 The DFA orderly liquidation
authority is viewed as to be used only as a last resort under a very
well-defined set of circumstances. To resolve a firm under the FDIC’s
orderly liquidation authority, a number of determinations must be
satisfied. First, the troubled firm must be designated a covered
financial company (CFC) and that it is in default or danger of default
and a resolution under bankruptcy would result in adverse consequences.
The determination to use OLA authority requires the assent of the
Treasury Secretary after consultation with the President.
Source
