Michael S. Gibson, the director of banking supervision and regulation at the Federal Reserve, recently said that while regulators have made substantial progress in resolving systemically important financial firms, cross-border resolution remains an obstacle.
Gibson said that while the U.S. has had the Order Liquidation Authority since 2010, many other areas and jurisdictions do not yet have national legislation that would establish a resolution regime.
“Mitigating the obstacles to cross-border resolution will, at a minimum, require key foreign jurisdictions to have implemented national resolution regimes consistent with the Key Attributes,” Gibson said. “Therefore, we will continue to encourage our fellow Financial Stability Board member jurisdictions to move forward with such reforms as quickly as possible.”
Gibson also said that the FDIC must have sufficient amounts of available debt at the parent holding company of the failed firm in order to execute it approach in the OLA, adding that the FDIC is considering requiring large complex firms to maintain a certain amount of long-term unsecured debt in addition to regulatory capital requirements.
“Such a requirement could have a number of public policy benefits,” Gibson said. “Most notably, it would increase the prospects for an orderly resolution under OLA by ensuring that shareholders and long-term debt holders of a systemic financial firm can bear potential future losses at the firm and sufficiently capitalize a bridge holding company in resolution. In addition, by increasing the credibility of OLA, a minimum long-term debt requirement could help counteract the moral hazard arising from taxpayer bailouts and improve market discipline of systemic firms. Switzerland, the United Kingdom, and the European Commission are moving forward with similar requirements, and it may be useful to work toward an international agreement on minimum total loss absorbency requirements for globally systemic firms.”
Additionally, Gibson said U.S. regulators should promote regulatory coordination between home and host supervisors in the event that an international, systemically important firm fails.
“Foreign subsidiaries and bank branches of a U.S.-based systemic financial firm could be ring-fenced or wound down separately under the insolvency laws of their host countries if foreign authorities did not have full confidence that local interests would be protected,” Gibson said. “Further progress on cross-border resolution ultimately will require significant bilateral and multilateral agreements among U.S. regulators and the key foreign central banks and supervisors for the largest global financial firms. It also may require that home-country authorities provide credible assurances to host-country supervisors to prevent disruptive forms of ring-fencing of the host-country operations of a failed firm…The groundwork for these agreements is being laid, but many of the most critical issues can be addressed only after other jurisdictions have effective resolution frameworks in place.”
Gibson said regulators should ensure home-country resolution of a global firm does not scare off creditors and counterparties.
“Counterparties to financial contracts with the foreign subsidiaries and branches of a U.S. firm may have contractual rights and substantial economic incentives to terminate their transactions as soon as the U.S. parent enters into resolution,” Gibson said. “Regulators and the industry are focused on the potential for addressing this concern through modifications to contractual cross-default and netting practices and through other means. The Federal Reserve will continue to support these efforts.”