FDIC Chair Sheila Bair said that the Financial Stability Oversight Council must move forward with hard metrics to aid in the designation of systemically important financial institutions under Dodd-Frank. Nobody is signing up in advance to be a SIFI, noted Ms Bair at a recent Chicago Fed conference. In fact, it is just the opposite. It might be far better to fall just short of SIFI status in terms of size, complexity, and interconnectedness. In that case, your institution would be spared all of the additional regulatory burdens, but policymakers could still face significant challenges in effecting an orderly resolution in a crisis. Using hard metrics to guide the SIFI designation process, noted the Chair, the FSOC must be able to gather information on a broad range of potential SIFIs in order to develop a sense of the difficulties that might arise in resolving them.
Ultimately, she emphasized, the "resolvability" of a financial institution should determine if it is designated as a SIFI. Upholding this standard will be essential if regulators are to avoid the "deathbed designation" of SIFIs that would put the resolution authority in the worst possible position in a crisis. Dodd-Frank created a new resolution framework that will apply to the systemically important financial institutions, or SIFIs, that are associated with the problem of Too Big to Fail.
This new SIFI resolution framework has three basic elements. First, the Financial Stability Oversight Council, chaired by Treasury and made up of the SEC and CFTC and other financial regulatory agencies, is responsible for designating SIFIs based on criteria that are now being established by regulation. Once designated, the SIFIs will be subject to heightened supervision by the Federal Reserve and required to maintain detailed resolution plans that demonstrate that they are resolvable—not bailout—if they should run into severe financial distress.
When a large, complex financial institution gets into trouble, the Chair explained. time is the enemy. The larger, more complex, and more interconnected a financial company is, the longer it takes to assemble a full and accurate picture of its operations and develop a resolution strategy. By requiring detailed resolution plans in advance, and authorizing an on-site FDIC team to conduct pre-resolution planning, the SIFI resolution framework regains the informational advantage that was lacking in the crisis of 2008.
The FDIC recently released a paper detailing how the filing of resolution plans, the ability to conduct advance planning, and other elements of the framework could have dramatically changed the outcome if they had been available in the case of Lehman. Under the new SIFI resolution framework, the FDIC should have a continuous presence at all designated SIFIs, working with the firms and reviewing their resolution plans as part of their normal course of business. The FDIC presence will in no way be seen as a signal of distress. Instead, it is much more likely to provide a stabilizing influence that encourages management to more fully consider the downside consequences of its actions, to the benefit of the financial institution and the stability of the system as a whole.