Statement of
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
on
Implementing Wall Street Reform
Enhancing Bank Supervision
And
Reducing Systemic Risk Committee
On
Banking, Housing, and Urban Affairs
U.S. Senate; 538 Dirksen
Senate Office Building
June 6, 2012
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
efforts to enhance bank supervision and reduce systemic risk. I will summarize the
FDIC's progress in implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), with a particular emphasis on the FDIC's
implementation of the Title II Orderly Liquidation Authority, as well as how new rules
promulgated under the Act affect community banking institutions. Before concluding, I
will also briefly address the implications of the recent trading losses at JPMorgan
Chase.
Implementation of the Dodd-Frank Act: Measures to Address Systemic Risk
The economic dislocations we have experienced in recent years, which have far
exceeded those associated with any recession since the 1930s, were the direct result of
the financial crisis of 2007-08. The reforms enacted under the Dodd-Frank Act were
aimed at addressing the root causes of the crisis. Foremost among these reforms were
measures to curb excessive risk-taking at large, complex banks and non-bank financial
companies, where the crisis began. Title I of the Dodd-Frank Act includes new
provisions that enhance prudential supervision and capital requirements for
systemically-important financial institutions (SIFIs), while Title II authorizes a new
orderly liquidation authority that significantly enhances the ability to resolve a failed SIFI
without contributing to additional financial market distress.
SIFI Resolution Authorities
The most important new FDIC authorities under the Dodd-Frank Act are those that
provide for enhanced resolution planning and, if needed, the orderly resolution of SIFIs.
Prior to the recent crisis, the FDIC's receivership authorities were limited to federally
insured banks and thrift institutions. There was no authority to place the holding
company or affiliates of an insured institution or any other non-bank financial company
into an FDIC receivership to avoid systemic consequences. The lack of this authority
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
on
Implementing Wall Street Reform
Enhancing Bank Supervision
And
Reducing Systemic Risk Committee
On
Banking, Housing, and Urban Affairs
U.S. Senate; 538 Dirksen
Senate Office Building
June 6, 2012
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
efforts to enhance bank supervision and reduce systemic risk. I will summarize the
FDIC's progress in implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), with a particular emphasis on the FDIC's
implementation of the Title II Orderly Liquidation Authority, as well as how new rules
promulgated under the Act affect community banking institutions. Before concluding, I
will also briefly address the implications of the recent trading losses at JPMorgan
Chase.
Implementation of the Dodd-Frank Act: Measures to Address Systemic Risk
The economic dislocations we have experienced in recent years, which have far
exceeded those associated with any recession since the 1930s, were the direct result of
the financial crisis of 2007-08. The reforms enacted under the Dodd-Frank Act were
aimed at addressing the root causes of the crisis. Foremost among these reforms were
measures to curb excessive risk-taking at large, complex banks and non-bank financial
companies, where the crisis began. Title I of the Dodd-Frank Act includes new
provisions that enhance prudential supervision and capital requirements for
systemically-important financial institutions (SIFIs), while Title II authorizes a new
orderly liquidation authority that significantly enhances the ability to resolve a failed SIFI
without contributing to additional financial market distress.
SIFI Resolution Authorities
The most important new FDIC authorities under the Dodd-Frank Act are those that
provide for enhanced resolution planning and, if needed, the orderly resolution of SIFIs.
Prior to the recent crisis, the FDIC's receivership authorities were limited to federally
insured banks and thrift institutions. There was no authority to place the holding
company or affiliates of an insured institution or any other non-bank financial company
into an FDIC receivership to avoid systemic consequences. The lack of this authority
severely constrained the ability of the government to resolve a SIFI and contributed to
the excessive risk taking that led to the crisis.
Since passage of the Dodd-Frank Act, the FDIC has taken a number of steps to carry
out its new systemic resolution responsibilities. First, the FDIC established a new Office
of Complex Financial Institutions (OCFI) to carry out three core functions:
monitor risk within and across these large, complex financial firms from the
standpoint of resolutions and risk to the Deposit Insurance Fund;
conduct resolution planning and develop strategies to respond to potential crises;
and
coordinate with regulators overseas regarding the significant challenges
associated with cross-border resolution.
For the past year, the OCFI has been developing internal resolution plans in order to be
ready to resolve a failing systemic financial company. These internal FDIC resolution
plans, developed pursuant to the Orderly Liquidation Authority provided under Title II of
the Dodd-Frank Act, apply many of the same powers that the FDIC has long used to
manage failed-bank receiverships to a failing SIFI. This internal resolution planning work
is the foundation of the FDIC's implementation of its new resolution responsibilities
under the Dodd-Frank Act.
The FDIC has largely completed the basic rulemaking necessary to carry out its
responsibilities under the Dodd-Frank Act. In July of last year, the FDIC Board approved
a final rule implementing the Title II Orderly Liquidation Authority. This rulemaking
addressed, among other things, the priority of claims and the treatment of similarly
situated creditors. Last September, the FDIC Board adopted two rules regarding
resolution plans that systemically important financial institutions themselves will be
required to prepare – the so-called "living wills." The first resolution plan rule, jointly
issued with the Federal Reserve Board, requires bank holding companies with total
consolidated assets of $50 billion or more, and certain nonbank financial companies
that the Financial Stability Oversight Council (FSOC) designates as systemic, to
develop, maintain and periodically submit resolution plans to regulators.
Complementing this joint rulemaking, the FDIC also issued another rule requiring any
FDIC-insured depository institution with assets over $50 billion to develop, maintain and
periodically submit plans outlining how the FDIC would resolve the institution through
the traditional resolution powers under the Federal Deposit Insurance Act. These two
resolution plan rulemakings are designed to work in tandem and complement each
other by covering the full range of business lines, legal entities and capital-structure
combinations within a large financial firm. Both of these resolution plan requirements will
improve efficiencies, risk management and contingency planning at the institutions
themselves. Importantly, they will supplement the FDIC's own resolution planning work
with information that would help facilitate an orderly resolution in the event of failure.
the excessive risk taking that led to the crisis.
Since passage of the Dodd-Frank Act, the FDIC has taken a number of steps to carry
out its new systemic resolution responsibilities. First, the FDIC established a new Office
of Complex Financial Institutions (OCFI) to carry out three core functions:
monitor risk within and across these large, complex financial firms from the
standpoint of resolutions and risk to the Deposit Insurance Fund;
conduct resolution planning and develop strategies to respond to potential crises;
and
coordinate with regulators overseas regarding the significant challenges
associated with cross-border resolution.
For the past year, the OCFI has been developing internal resolution plans in order to be
ready to resolve a failing systemic financial company. These internal FDIC resolution
plans, developed pursuant to the Orderly Liquidation Authority provided under Title II of
the Dodd-Frank Act, apply many of the same powers that the FDIC has long used to
manage failed-bank receiverships to a failing SIFI. This internal resolution planning work
is the foundation of the FDIC's implementation of its new resolution responsibilities
under the Dodd-Frank Act.
The FDIC has largely completed the basic rulemaking necessary to carry out its
responsibilities under the Dodd-Frank Act. In July of last year, the FDIC Board approved
a final rule implementing the Title II Orderly Liquidation Authority. This rulemaking
addressed, among other things, the priority of claims and the treatment of similarly
situated creditors. Last September, the FDIC Board adopted two rules regarding
resolution plans that systemically important financial institutions themselves will be
required to prepare – the so-called "living wills." The first resolution plan rule, jointly
issued with the Federal Reserve Board, requires bank holding companies with total
consolidated assets of $50 billion or more, and certain nonbank financial companies
that the Financial Stability Oversight Council (FSOC) designates as systemic, to
develop, maintain and periodically submit resolution plans to regulators.
Complementing this joint rulemaking, the FDIC also issued another rule requiring any
FDIC-insured depository institution with assets over $50 billion to develop, maintain and
periodically submit plans outlining how the FDIC would resolve the institution through
the traditional resolution powers under the Federal Deposit Insurance Act. These two
resolution plan rulemakings are designed to work in tandem and complement each
other by covering the full range of business lines, legal entities and capital-structure
combinations within a large financial firm. Both of these resolution plan requirements will
improve efficiencies, risk management and contingency planning at the institutions
themselves. Importantly, they will supplement the FDIC's own resolution planning work
with information that would help facilitate an orderly resolution in the event of failure.