‘More work’ needed in living wills process, which has been ‘enormously helpful,’ FDIC leader says

The “living wills” process for resolving the largest U.S. financial institutions has proven “enormously helpful” to both firms and regulators, but there is more work to be done in four particular areas to improve the “resolvability” of the large companies, the head of the federal deposit insurance agency said Friday.

In remarks to the Wharton School at the University of Pennsylvania, Federal Deposit Insurance Corp. (FDIC) Board Chairman Martin Gruenberg said federal banking agencies in December identified four areas in which work is needed to be done by all eight of the U.S. Global Systemically Important Banks (GSIBs) to continue improving resolvability. Those are, he said: intra-group liquidity; internal loss-absorbing capacity; derivatives; and payment, clearing, and settlement activities.

“Given the size and complexity of these firms and the uncertainty of market developments, there are inherent challenges and uncertainties associated with the resolution of a systemically important financial institution,” he said. “It is worth keeping in mind that we have not yet executed an orderly resolution of a financial institution of systemic consequence either under bankruptcy or the Orderly Liquidation Authority. We should therefore be cautious about making heroic statements.”

Gruenberg acknowledged that times have changed since the financial crisis in 2008, and that “options and tools” now exist providing “a path far better” than existed 10 years ago. Those include: ensuring that a systemic firm can fail; shareholders, creditors, and management of firms bearing the consequences of their decisions; and preserving financial stability during times of stress without taxpayer bailouts.

In other remarks, Gruenberg said that much of his tenure at the FDIC “has been spent responding to and working to avoid another financial crisis.” That tenure will come to an end, likely soon, once FDIC Chair nominee Jelena McWilliams is confirmed by the Senate, which has been recommended by the Senate Banking Committee.

Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation “Resolving a Systemically Important Financial Institution: A Progress Report”