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Understanding Large Bank Resolutions: FDIC Insights and Strategies

This document provides an overview from Fred Carns, Director of the FDIC’s Division of Insurance and Research, regarding the resolution of large banks. It discusses the legal framework and objectives of the FDIC, the complexities of bank failures, including holding company structures and foreign operations. Critical issues such as resolution costs, qualified financial contracts (QFCs), and systemic risk are explored. The paper emphasizes the balance between market discipline and financial stability, aiming to minimize insurance fund costs while providing liquidity to depositors.

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Understanding Large Bank Resolutions: FDIC Insights and Strategies

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  1. Resolving a Large Bank: FDIC’s Perspective Fred Carns Director, Division of Insurance and Research Federal Deposit Insurance Corporation

  2. Overview • Legal framework • FDIC objectives • Selected issues • Resolution options

  3. Legal Constraints • Least-cost test • Systemic risk exception • Discount window borrowing • Qualified Financial Contracts (QFCs)

  4. Complexities of a Large Bank Failure • Bank characteristics • Size • Holding company structure • Foreign operations • QFCs and role in the derivatives markets • Payment systems role • Failure characteristics • Speed • Failure date may be determined by markets, not regulators • Not necessarily on Friday

  5. Industry Statistics FDIC-insured banking assets by company, as of June 30, 2004. Dollars are reported in billions.

  6. FDIC Objectives • Adhere to the spirit of FDICIA • A balancing act • Market discipline vs. financial stability • More specifically: • Minimize insurance fund cost • Minimize systemic risk • Provide liquidity to depositors • Manage liquidity in the deposit insurance fund(s)

  7. Selected Issues • Resolution cost estimates for various options • Deposit insurance claims • Relationships with the holding company • QFCs • Funding

  8. What might a resolution look like? • Not orchestrated on a Friday • Resolution options • QFC options • Deposit options • Links to the holding company

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