FDIC plan to unwind SIFIs allows for continued existence of healthy subsidiaries

Martin Gruenberg

Acting FDIC Chairman Martin Gruenberg recently revealed the process that would be used by the FDIC to unravel firms deemed “systemically important financial institutions” — or SIFIs.

Under the 2010 Dodd-Frank Act, the FDIC has the authority to seize and take apart large financial institutions and non-bank firms to prevent another taxpayer-funded Wall Street bailout, eCreditDaily reports.

Gruenberg said that the most likely process would be the placement of the parent company into receivership and the transfer of the firm’s assets to investments in its subsidiaries, ultimately creating a “bridge holding company” that allows for the continued existence of the firm’s healthy subsidiaries.

“This will allow subsidiaries that are equity solvent and contribute to the franchise value of the firm to remain open and avoid the disruption that would likely accompany their closings,” Gruenberg said, according to eCreditDaily.

Because the parent company’s subsidiaries would be afforded continued operation, the FDIC further expects qualified financial contracts to also function as usual.

“In short, we believe that this resolution strategy will preserve the franchise value of the firm and mitigate systemic consequences,” Gruenberg said, eCreditDaily reports. “This responds to the goal of financial stability.”

Gruenberg said that the equity claims of the firm’s shareholders, as well as the claims of the unsecured and subordinated debt holders, would be left behind in receivership. The receivership would instead have equity in the bridge holding company as an asset.

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