WASHINGTON — Bank industry experts continue to doubt regulators' ability to resolve a failed global systemically important bank despite attempts by a major federal bank regulator to reassure markets of the agency's ability to do so.
It's never been done, and experts say the federal government's unwillingness to resolve even a midsize bank in March 2023 without resorting to a bailout makes the odds of winding down one of the GSIB behemoths seem increasingly remote.
"I don't think most investors or bankers are convinced that any given resolution strategy will be used, let alone work," said Ian Katz, an analyst with Capital Alpha Partners. "There aren't just questions but outright doubts. People aren't going to believe any given plan will work until they see it work."
Roughly a year after
Arthur Wilmarth, a law professor at George Washington University, noted regulators' decision to forgo such a process with SVB has reinforced industry skepticism about the federal government's willingness to let even midsize banks, let alone large, systemically important banks fail.
"Silicon Valley Bank provided the FDIC, the Fed and the Treasury Department with a perfect opportunity to show that the Title II of the Dodd-Frank Act provides an effective way to resolve the failure of a large bank holding company," said Wilmarth. "By deciding not to establish an [Orderly Liquidation Authority] receivership for SVB, federal regulators have created significant doubts whether Title II of the Dodd-Frank Act will ever be used to resolve a systemically important bank holding company — especially one that is much larger than SVB."
The fact that SVB's failure caused regulators to invoke a systemic risk exception demonstrated to many observers that even banks that are not designated as systemically important could pose systemic risks were they to fail. Silicon Valley Bank — which had just over an estimated $200 billion of assets when it failed — was not nearly as large as some of the GSIBs, many of which
When it looked like SVB would fail, federal regulators — including the FDIC, Federal Reserve and Treasury jointly decided to invoke a systemic risk exception to protect SVB's uninsured depositors and stave off what they saw as the potential for contagion that could have toppled other large banks.
Wilmarth notes this decision depleted the FDIC's Deposit Insurance Fund — rather than the Orderly Liquidation Fund — which the FDIC has a statutory requirement to recoup through a special fee on banks. That ultimately leaves taxpayers — who backstop the FDIC's DIF — on the hook.
Title II of the Dodd-Frank Act provides the banking agencies an alternative for avoiding this kind of scenario under what's known as the Orderly Liquidation Authority, where the FDIC becomes receiver of the bank's parent holding company.
"Establishing an OLA receivership would have ensured that the costs of protecting SVB's uninsured depositors and other costs of the OLA receivership would have been covered by the Orderly Liquidation Fund," Wilmarth noted. "The decision not to establish an OLA receivership for SVB has created the same kind of deep skepticism as the decision by Swiss authorities not to use a comparable approach in dealing with
Unlike SVB, two other banks which successively failed in March 2023 — Signature Bank and First Republic Bank — could not be resolved under Title II because those banks are not banking subsidiaries of a parent holding company.
Wilmarth notes SVB and
"Those failures were not resolved through the internal resolution strategy contemplated by Title II of the Dodd-Frank Act and similar Swiss legislation," he said. "As a result, the 'no more bailouts' pledge contained in the preamble to the Dodd-Frank Act (and in similar legislation enacted by other countries) remains an empty and unproven promise."
Gruenberg admitted winding down a GSIB remains a daunting and untested hypothesis, saying there will continue to be "questions" as to whether the agency has the political will to do so.
Isaac Boltansky, managing director with BTIG, says it's implausible that policymakers will muster the political will or logistic readiness to resolve a systemically important bank at the moment such a decision would have to be made.
"Regulators handled the turmoil from last March as well as they could at that point in time, but we were still triggering the systemic risk exemption on a Sunday night," he said. "There is a deep skepticism that we will see a G-SIB wound down. Most market participants believe we will see more supervisory pressure, and novel enforcement mechanisms such as asset caps and business line restrictions."
Former Federal Housing Finance Agency Director Mark Calabria argues the FDIC's report may be a sort of regulatory finger wag at the market, reminding market participants that Title II is still good law.
"I see this as an effort to rebuild FDIC credibility after last year's bank rescues. A sort of, 'Yeah we did some bailouts, but don't count on it next time,'" said Calabria. "Overall, I think it's a needed and useful statement, although I think the only way market participants will believe it is when you actually do a Title II resolution without taxpayer assistance."
