Federal Reserve Governor Daniel K. Tarullo said during a conference last week that “growing consensus” regarding the elements of a “credible” resolution mechanism is one of the “more heralded—if still in progress—successes” of the post-crisis regulatory response.
“Stated more analytically, a special resolution mechanism is needed to take account of the characteristics of financial markets, and of larger firms operating in those markets, that do not fit easily with normal bankruptcy practice,” Tarullo said. “These characteristics all relate to a basic function of financial intermediaries in providing liquidity to firms and households–whether through maturity transformation, by which banks allow depositors to lend out their savings while maintaining complete liquidity; through market-making, by which dealers provide liquidity to investors in various instruments; or through other forms of intermediation.”
Tarullo said a “credible” resolution mechanism must be capable of addressing the characteristics of financial markets, as intended by Dodd-Frank’s Title II, adding that the provision allows for speed, immediate funding and a temporary stay of close-out rights of qualified counterparties.
“While Title II establishes a special resolution mechanism and grants the FDIC powers responsive to the special challenges posed by the failure of large financial institutions, it provides only a legal framework, not an elaborated description of how these powers would be used to resolve a systemically important financial firm,” Tarullo said. “[F]or orderly liquidation authority to be effective in containing too-big-to-fail concerns and supporting financial stability, the statutory provisions must be supplemented with administrative planning by the FDIC and with consistent measures in other jurisdictions.”