FDIC Seeks Strong Oversight Of 'Too Big To Fail' Firms

NU Online News Service, May 6, 3:56 p.m. EDT

WASHINGTON–Congress may act quickly on legislation creating stronger resolution authority oversight for troubled financial institutions deemed "too big to fail," including insurers and hedge funds, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said today.

Such a resolution authority should have the power to sell the assets of the troubled institutions promptly to other companies, FDIC Chairperson Sheila Bair said.

Sen. Dodd made his comments at a hearing on systemic risk, at which Ms. Bair testified that creating a resolution regime that applies to any financial institution that becomes a source of systemic risk "should be an urgent priority."

And, she said, putting the authority in place quickly could encourage large financial firms to put more emphasis on dealing with troubled assets.

She also said federal regulators should have broad powers to deal with troubled institutions. She noted that "the purpose of the resolution authority should not be to prop up a failed entity indefinitely, but to permit the swift and orderly dissolution of the entity and the absorption of its assets by the private sector as quickly as possible."

That would seemingly address the complaints of property-casualty insurance companies and some members of Congress that the government's loans of large sums of money to American International Group provides an unfair competitive advantage to AIG.

Sen. Dodd said, "I will talk to my colleagues about whether we should proceed quickly to implement this authority or wait to do it as part of a package."

In comments to reporters as he left the meeting to head to the Senate floor for a vote, Sen. Dodd again indicated that he is rethinking his position of creating a resolution authority for too-big-to-fail institutions only as a part of a larger package designed to deal with troubled large institutions.

In her comments, Ms. Bair reassured members of the committee that her agency had the ability to deal with resolving troubled banks and non-banks.

Indeed, under certain conditions, she said, the agency would hire subcontractors familiar with the particular institutions to help with the resolution process.

She proposed creating a systemic risk council to address issues posing risks to the broader financial system. Ms. Bair said this body would include the Treasury Department, the FDIC, the Federal Reserve Board, the Securities and Exchange Commission, and…"other prudential supervisors as well," i.e. including primary regulators of troubled insurance companies.

But in dealing with troubled "too big to fail" institutions, Ms. Bair pictured federal agencies as having broad authority. They should have the power to provide analytical support, develop needed prudential policies and mitigate developing risks–or preempt the authority of the primary regulator.

And, she said, "to be truly credible," a new systemic resolution authority should be funded by fees or assessments charged to systemically important firms. "Fees imposed on these firms could be imposed either before failures, to prefund a resolution," which she recommends, or fees could be assesses after a systemic resolution.

She suggested that such assessments be paid by "systemically significant financial companies" and be placed in a "Financial Companies Resolution Fund."

A FCRF would not be funded to provide a guarantee to the creditors of systemically important institutions but rather to cover the administrative costs of the resolution and the costs of any debtor-in-possession lending that would be necessary to ensure an orderly unwinding of a financial company's affairs, she testified.

"Any administrative costs and/or debtor-in-possession lending that could not be recovered from the estate of the resolved firm would be covered by the FCRF," she added.

At the same time, if a company fell below the threshold of a too-big-to-fail institution, the assessments would stop, she said.