If big banks fail again, creditors will see only limited protection

November 29, 2010

Banking & Finance

By Ted Carter

Been wondering just how the federal government plans to divvy up the assets of the Too-Big-to-Fail financial institutions if they go wobbly again?

It will do the resolution assets the same way it handles those of much smaller institutions, FDIC Chairman Sheila C. Bair told the National Conference on the Securities Industry in New York recently.

As we know, from all the Friday afternoon padlocking of troubled banks around the country the last couple years, the FDIC carries out a prompt and orderly resolution process using its receivership authority for insured banks and thrifts. “The Dodd-Frank Act for the first time gives the FDIC a similar set of receivership powers to close and liquidate systemically-important financial firms that are failing,” Bair says.

But creditors won’t be equal under the law, Bair emphasizes. The new law, she says, gives the FDIC authority “to pay certain creditors more than others when necessary to maintain essential operations or to maximize recoveries. But our proposed rule makes clear that shareholders and holders of subordinated and senior unsecured debt will never qualify to receive additional payments above the liquidation value of assets under the statutory priority of claims.”

It also affirms that secured creditors will only be protected to the extent of the fair value of their collateral, with any unsecured portion remaining subject to loss. “By ensuring that all creditors know they are at risk of loss in a failure, this proposed rule is a solid first step in implementing the resolution authority under Dodd-Frank and ending Too Big To Fail,” Bair says.

She says the FDIC and Federal Reserve plan to be deeply involved in developing requirements for the resolution plans that all systemically important financial companies now have to establish. These resolution plans are essentially blueprints for the orderly unwinding of these companies if they should run into serious problems, she says, making note of the “considerable authority” vested in her agency and the Federal Reserve in shaping the content of the resolution plans.

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