FDIC's Global Wind-Down Tour Makes More Stops

WASHINGTON — The Federal Deposit Insurance Corp.'s talks with foreign regulators about cross-border resolution plans have up to now mostly been a two-party exercise. But that is rapidly changing.

As it seeks to coordinate wind-down mechanisms overseas, the FDIC has expanded its efforts beyond just the United Kingdom, elevating dialogue with other jurisdictions where U.S. firms do business and taking an active role in multilateral efforts to develop common resolution standards across many nations.

"Right now the focus is still on the UK, because that's where most of the cross-border exposure still is. But the FDIC is branching out more broadly in Europe," said Randall Guynn, a partner at Davis Polk & Wardwell.

With nearly 90% of U.S. firms' foreign activities based in London, the FDIC has held talks with U.K. regulators about coordination since before the 2010 Dodd-Frank Act authorized the FDIC's new resolution powers for global systemically important financial institutions. But the remaining 10% — combined with the fact that London offices of U.S. firms can do business in other member countries of the European Union — has forced a broader view. (Behind the U.K., Japan is a distant second as the host country for 3% of U.S. firms' foreign presence.)

"There are certain back-office operations or processing centers" for large firms "housed in unexpected jurisdictions — ones that wouldn't pop up on someone's radar screen," said James Wigand, the director of the FDIC's Office of Complex Financial Institutions. "We would need to have discussions with the authorities in those jurisdictions as well to be in a position to operationalize a G-SIFI resolution."

But unlike efforts to get on the same page with the U.K., some observers said attempts to collaborate elsewhere will prove trickier. Generally, other nations have not developed resolution processes or even deposit insurance systems to the same extent as the U.S. and the U.K., and some disagreements about how to proceed — within the European Union, for example — also persist. Although the growing international focus on resolution issues could result in formal accords on wind-down systems for global firms, similar to the Basel regime for international capital requirements, many say additional countries will have to start talking seriously about the concept before that is a reality.

"It may be the direction we're going in, but we're not far enough along in the evolution of this process to say whether that will happen," said Jay Westbrook, a business law professor at the University of Texas. "One of the most serious complications is that some countries have deposit insurance and a resolution authority and some don't. The terms and amounts of national deposit insurance guarantees also vary greatly between countries. That makes it complicated as to who is responsible for which deposits."

The debate about resolution powers, to be clear, has not ended in the U.S. Doubts persist about whether the FDIC, which traditionally cleans up failed banks, can handle resolutions of globally-connected firms, and the chorus of voices — including of lawmakers — calling for the more drastic step of a big-bank breakup to limit systemic risks is only getting louder. But the FDIC nevertheless is still focused on preparing the new facility, and that has meant taking on a more visible international role. Last month, the FDIC hosted talks with European Commission officials to discuss, among other things, coordination and EU efforts to develop common resolution standards for the continent. Another meeting will be held in Brussels later this year.

The FDIC is also involved in the Financial Stability Board's attempts to make resolution processes more common around the world, participating in FSB "crisis management" groups — each focused on an individual globally-connected firm — consisting of both the home country's authority and those that host the firm's foreign activities. The FDIC is also leading an initial FSB "peer review" to evaluate progress of resolution regimes in member nations against the FSB's 2011 guidance on "key attributes" of effective resolutions. The review is due to be completed next quarter.

Wigand said talks with the E.C. have focused in part on European authorities trying to understand the FDIC's progress to date as the EU develops its model, with the FDIC wanting to ensure EU officials have U.S. coordination in mind.

"The dialogue is mutually beneficial. In addition to building relationships, the E.C. is interested in understanding our framework and learning about our experiences. We, on the other hand, are interested in learning about the framework they may adopt," he said. "At some point the E.C. will adopt a framework and then we'll have to take it to the next step of, ‘Ok, given these frameworks, how are we going to deal with cross-border issues?'"

The need for better systems to deal internationally with resolution and depositor protection was perhaps best illustrated by the recent images of bank customers in Cyprus attempting to withdraw funds following a proposal to tax depositors as part of the country's bailout plan.

But a laundry list of obstacles remains.

"There is considerable progress in terms of working through a few very large institutions with operations based in the U.S. and the U.K. Beyond that, there is very little progress. The models are different. The resolution protocols, for example, in the EU are uncertain. If you go to Japan or China, they are still very different," said Karen Shaw Petrou, managing partner for Federal Financial Analytics Inc. "The challenge with the U.K. was there was a single government with a clear set of policy objectives … but a lack of statutory authority to do what it committed to. The problem in the EU is that there are a lot of governments that completely disagree on everything having to do with resolution and they don't have statutory authority to do much of anything anytime soon."

She noted there are key structural differences between the U.S. and European banking models that could pose challenges in a cross-border resolution scenario.

"Not only is there patchy deposit insurance with widely different coverages across the Eurozone and the EU more broadly, but in most of those countries there are a very few very large banks that are ‘too big to save,'" she said. "Their assets are sometimes significantly higher than national GDP."

But Wigand said the heightened international chatter about creating resolution practices is advancing the issue.

"There are challenges because of the differences from where respective jurisdictions are starting the process. But, nonetheless, there has been a significant and transformational shift from where we were pre-crisis to where we are today in dealing with international and cross-border coordination of resolution activities," he said. "There was very little discussion of recovery and resolution prior to the crisis. Now these have become embedded work-streams that jurisdictions are seriously considering or already in the process of undertaking."

Guynn said the resolution approach embraced both by U.S. and U.K. regulators may avoid some of the cross-border complications with other regimes. Both nations are focused on "single point of entry" resolutions, in which a parent company is shut down, shareholder and creditor losses help to recapitalize a new bridge firm and the still-healthy subsidiaries and branches keep functioning.

"The single point of entry approach avoids most of the really difficult cross-border issues. … You only have to transfer the assets of the holding company, which typically doesn't have branches overseas," he said.

Wigand noted that the FSB's 2011 document about model resolution standards was not as "granular or quantifiable as what we think of when discussing Basel supervisory requirements, but … there is a level of international base-setting associated with these efforts, and I think that that will continue."

But others said supervisory issues such as capital levels tend to hold regulators' attention more strongly during periods of low stress.

"The problem is that unlike Basel capital rules, resolution regimes really only become a focus during a crisis, and in a crisis nations tend to act territorially and try to protect their interests. So I'm not sure it would work in the same way as purely supervisory rules," said Heidi Mandanis Schooner, a law professor at Catholic University of America. "I'm thrilled to see that countries are taking this issue very seriously and are trying to develop strong coordination. But it's very hard to ensure that this is going to work in a crisis because no one knows what a crisis is going to look like."