He
noted that stand-alone subsidiaries would be easier to manage and regulate and
far less messy to resolve. The failure of one or more subsidiaries would result
in an investment loss for the parent corporation, he noted, but would not
necessarily result in the disorderly collapse of the financial institution. If
the financial institution became insolvent, many subsidiaries could still
operate relatively normally. Stand-alone subsidiaries could be sold or spun off
without significant disruption to the financial firm or the financial system,
even in a crisis, without damaging the franchise value of the subsidiaries.
According
to Rep. Miller, stand-alone subsidiaries would also provide prudential
regulators with an important ally, the financial market, in the oversight of
systemically significant institutions: Each of the systemically significant
institutions has hundreds if not thousands of subsidiaries. The financial institutions
create subsidiaries for regulatory or tax purposes, noted Rep. Miller, but
operate the firm as a single enterprise with consolidated management and a common
pool of capital and liquidity. While the financial institution presents the
subsidiaries to taxing authorities and regulators as separate entities, said
Rep. Miller, the firm assures counterparties that all of the assets of the financial
institution stand behind each subsidiary.
Practically
speaking, the prudential regulators have no realistic way to assess the risk
posed in thousands of subsidiaries engaged in all manner of businesses and
neither do counterparties, warned Rep. Miller. Counterparties assume that the financial
institutions are still too big to fail, so they will get paid one way or another.
But if counterparties knew that they could only be paid from the assets of the
specific subsidiary with which they did business, he reasoned, they would
consider that subsidiary's assets and potential liabilities. The adequacy of
capital would be far easier to judge if the capital was devoted to a specific
subsidiary.
In
his view, this restoration of market discipline would go a long way to solving
the too big to fail problem. If subsidiaries engaged in other business lines
were small enough to fail, prudential regulators could pay closer attention to
the activities that create the greatest risk of economic disruption.
The congressman also
urged the Fed and FDIC to exercise their authority under the
living wills provision of the Dodd Frank Act with more energy, ambition and
urgency. In the letter to the Fed and FDIC Chairs, he referenced recent concerns
voiced by William Dudley, the president of the Federal Reserve Bank of New York,
that the living wills submitted by systemically significant financial
institutions this summer confirmed that we are a long way from the desired
situation in which large complex firms could be allowed to go bankrupt without
major disruptions to the financial system. Significant changes in structure and
organization will ultimately be required for this to happen.
Rep.
Miller agreed with Mr. Dudley that "ultimately" is an unacceptable
deadline for structural changes required for credible resolution plans. The
legislator warned that the uncertainties in the financial system may not allow
for year after year of polite suggestions by regulators and modest tweaks by financial
institutions.