FDIC approves 'Too Big to Fail' plan to seize big banks in crisis

03/15/2011 21:10

DealBook  NYT

A top banking regulator approved a plan to seize and unwind big banks — a proposal that will help address those “too big to fail” firms whose collapse could imperil the financial system.

The board of Federal Deposit Insurance Corporation voted unanimously on Tuesday to approve a set of proposed rules intended to create an orderly process to unwind large financial institutions. The rules outline how creditors can file a claim and how those claims will be addressed, hopefully bringing some clarity to a previously murky situation.

The vote moves the proposal into a 60-day public comment period, after which the agency will have to settle on final rules. The rule would apply to big banks, financial firms and large nonfinancial companies that pose a systemic risk to the broader economy.

 “Today’s action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size,” Sheila C. Bair, the F.D.I.C. chairwoman, said in a statement. Under the Dodd-Frank regulatory overhaul, “the shareholders and creditors will bear the cost of any failure, not taxpayers.”

As part of Dodd-Frank, the F.D.I.C. was tasked with the authority to unwind financial firms considered an integral part of the economy. There was no clear procedures in place before, a problem that became apparent when Lehman Brothers went bankrupt in the fall of 2008.

The meat of the F.D.I.C.’s plan focuses on how to deal with such firms should they collapse. The rules would set up a framework under which creditors of the financial firm could try to recoup their money through a receiver and pursue the matter in court if necessary.

The proposal “provides clarity to the process by letting creditors know clearly how they can file a claim and how they will be paid for their claims,” Ms. Bair said in a statement. “This is an important step in providing certainty for the market in this new process.”

The proposal also deals with another hot-button issue: pay clawbacks. Under the rules, the F.D.I.C. could recoup the compensation of “persons who are substantially responsible for the failed condition of a covered financial company.”

That definition is open to the interpretation of regulators. To determine who fits the bill, authorities would look at how the executives performed their duties and the financial results that followed. Executives and directors “who perform their responsibilities with the requisite degree of skill and care will not be required to forfeit their compensation.” On the flip side, those who don’t meet with regulators’ approval would potentially have to give up their bonuses or other monetary incentives.


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