Statement of
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
On
Implementation of the Dodd-Frank Wall Street Reform
And
Consumer Protection Act
to the
Committee on Banking, Housing, and
Urban Affairs, U.S. Senate; 538 Dirksen
Senate Office Building
February 17, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) progress in implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
The recent financial crisis exposed grave shortcomings in our framework for regulating
the financial system. Insufficient capital at many financial institutions, misaligned
incentives in securitization markets and the rise of a largely unregulated shadow
banking system bred excess and instability in our financial system that led directly to the
crisis of September 2008. When the crisis hit, regulatory options for responding to
distress in large, non-bank financial companies left policymakers with a no-win dilemma:
either prop up failing institutions with expensive bailouts or allow destabilizing
liquidations through the normal bankruptcy process. The bankruptcy of Lehman
Brothers Holdings Inc. (Lehman) in September 2008 triggered a liquidity crisis at AIG
and other institutions that froze our system of intercompany finance and made the
2007-09 recession the most severe since the 1930s.
The landmark Dodd-Frank Act enacted last year created a comprehensive new
regulatory and resolution regime that is designed to protect the American people from
the severe economic consequences of financial instability. The Dodd-Frank Act gave
regulators tools to limit risk in individual financial institutions and transactions, enhance
the supervision of large non-bank financial companies, and facilitate the orderly closing
and liquidation of large banking organizations and non-bank financial companies in the
event of failure. Recognizing the urgent need for reform and the importance of a
deliberative process, the Act directed the FDIC and the other regulatory agencies to
promulgate implementing regulations under a notice and comment process and to do so
within specified timeframes. The FDIC is required or authorized to implement some 44
regulations, including 18 independent and 26 joint rulemakings. The Dodd-Frank Act
also grants the FDIC new or enhanced enforcement authorities, new reporting
requirements, and responsibility for numerous other actions.
We are now in the process of implementing the provisions of the Dodd-Frank Act as
expeditiously and transparently as possible. The lessons of history – recent and distant
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
On
Implementation of the Dodd-Frank Wall Street Reform
And
Consumer Protection Act
to the
Committee on Banking, Housing, and
Urban Affairs, U.S. Senate; 538 Dirksen
Senate Office Building
February 17, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) progress in implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
The recent financial crisis exposed grave shortcomings in our framework for regulating
the financial system. Insufficient capital at many financial institutions, misaligned
incentives in securitization markets and the rise of a largely unregulated shadow
banking system bred excess and instability in our financial system that led directly to the
crisis of September 2008. When the crisis hit, regulatory options for responding to
distress in large, non-bank financial companies left policymakers with a no-win dilemma:
either prop up failing institutions with expensive bailouts or allow destabilizing
liquidations through the normal bankruptcy process. The bankruptcy of Lehman
Brothers Holdings Inc. (Lehman) in September 2008 triggered a liquidity crisis at AIG
and other institutions that froze our system of intercompany finance and made the
2007-09 recession the most severe since the 1930s.
The landmark Dodd-Frank Act enacted last year created a comprehensive new
regulatory and resolution regime that is designed to protect the American people from
the severe economic consequences of financial instability. The Dodd-Frank Act gave
regulators tools to limit risk in individual financial institutions and transactions, enhance
the supervision of large non-bank financial companies, and facilitate the orderly closing
and liquidation of large banking organizations and non-bank financial companies in the
event of failure. Recognizing the urgent need for reform and the importance of a
deliberative process, the Act directed the FDIC and the other regulatory agencies to
promulgate implementing regulations under a notice and comment process and to do so
within specified timeframes. The FDIC is required or authorized to implement some 44
regulations, including 18 independent and 26 joint rulemakings. The Dodd-Frank Act
also grants the FDIC new or enhanced enforcement authorities, new reporting
requirements, and responsibility for numerous other actions.
We are now in the process of implementing the provisions of the Dodd-Frank Act as
expeditiously and transparently as possible. The lessons of history – recent and distant
– remind us that financial markets cannot function for long in an efficient and stable
manner without strong, clear regulatory guidelines. We know all too well that the market
structures in place prior to the crisis led to misaligned incentives, a lack of transparency,
insufficient capital, and excessive risk taking. As a result, the U.S. and global
economies suffered a grievous blow. Millions of Americans lost their jobs, their homes,
or both, even as almost all of our largest financial institutions received assistance from
the government that enabled them to survive and recover. Memories of such events
tend to be short once a crisis has passed, but we as regulators must never forget the
enormous economic costs of the inadequate regulatory framework that allowed the
crisis to occur in the first place. At the same time, our approach must also account for
the potential high cost of needless or ill-conceived regulation – particularly to those in
the vital community banking sector whose lending to creditworthy borrowers is
necessary for a sustained economic recovery.
My testimony will review the FDIC's efforts to date to implement the provisions of Dodd-
Frank and highlight what we see as issues of particular importance.
Implementing the Resolution Authority and Ending Too Big To Fail
A significant number of the FDIC's rulemakings stem from the Dodd-Frank Act's
mandate to end "Too Big to Fail." This includes our Orderly Liquidation Authority under
Title II of the Act, our joint rulemaking with the Board of Governors of the Federal
Reserve System (FRB) on requirements for resolution plans (or living wills) that will
apply to systemically important financial institutions (SIFIs), and the development of
criteria for determining which firms will be designated as SIFIs by the Financial Stability
Oversight Council (FSOC).
Orderly Liquidation Authority
The Lehman bankruptcy in September 2008 demonstrated the confusion and chaos that
can result when a large, highly complex financial institution collapses into bankruptcy.
The Lehman bankruptcy had an immediate and negative effect on U.S. financial stability
and has proven to be a disorderly, time-consuming, and expensive process.
Unfortunately, bankruptcy cannot always provide the basis for an orderly resolution of a
SIFI or preserve financial stability. To overcome these problems, the Dodd-Frank Act
provides for an Orderly Liquidation Authority with the ability to: plan for a resolution and
liquidation, provide liquidity to maintain key assets and operations, and conduct an open
bidding process to sell a SIFI and its assets and operations to the private sector as
quickly as possible.
While Title I of the Dodd-Frank Act significantly enhances regulators' ability to conduct
advance resolution planning for SIFIs, Title II vests the FDIC with legal resolution
authorities similar to those that it already applies to insured depository institutions (IDIs).
If the FDIC is appointed as receiver, it is required to carry out an orderly liquidation of
the financial company. Title II also requires that creditors and shareholders "bear the
manner without strong, clear regulatory guidelines. We know all too well that the market
structures in place prior to the crisis led to misaligned incentives, a lack of transparency,
insufficient capital, and excessive risk taking. As a result, the U.S. and global
economies suffered a grievous blow. Millions of Americans lost their jobs, their homes,
or both, even as almost all of our largest financial institutions received assistance from
the government that enabled them to survive and recover. Memories of such events
tend to be short once a crisis has passed, but we as regulators must never forget the
enormous economic costs of the inadequate regulatory framework that allowed the
crisis to occur in the first place. At the same time, our approach must also account for
the potential high cost of needless or ill-conceived regulation – particularly to those in
the vital community banking sector whose lending to creditworthy borrowers is
necessary for a sustained economic recovery.
My testimony will review the FDIC's efforts to date to implement the provisions of Dodd-
Frank and highlight what we see as issues of particular importance.
Implementing the Resolution Authority and Ending Too Big To Fail
A significant number of the FDIC's rulemakings stem from the Dodd-Frank Act's
mandate to end "Too Big to Fail." This includes our Orderly Liquidation Authority under
Title II of the Act, our joint rulemaking with the Board of Governors of the Federal
Reserve System (FRB) on requirements for resolution plans (or living wills) that will
apply to systemically important financial institutions (SIFIs), and the development of
criteria for determining which firms will be designated as SIFIs by the Financial Stability
Oversight Council (FSOC).
Orderly Liquidation Authority
The Lehman bankruptcy in September 2008 demonstrated the confusion and chaos that
can result when a large, highly complex financial institution collapses into bankruptcy.
The Lehman bankruptcy had an immediate and negative effect on U.S. financial stability
and has proven to be a disorderly, time-consuming, and expensive process.
Unfortunately, bankruptcy cannot always provide the basis for an orderly resolution of a
SIFI or preserve financial stability. To overcome these problems, the Dodd-Frank Act
provides for an Orderly Liquidation Authority with the ability to: plan for a resolution and
liquidation, provide liquidity to maintain key assets and operations, and conduct an open
bidding process to sell a SIFI and its assets and operations to the private sector as
quickly as possible.
While Title I of the Dodd-Frank Act significantly enhances regulators' ability to conduct
advance resolution planning for SIFIs, Title II vests the FDIC with legal resolution
authorities similar to those that it already applies to insured depository institutions (IDIs).
If the FDIC is appointed as receiver, it is required to carry out an orderly liquidation of
the financial company. Title II also requires that creditors and shareholders "bear the