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The FDIC as Systemic Resolution Authority

Joseph R. Mason

 There has been much discussion lately regarding the appropriate source resolution authority for systemically-important institutions. So far, however, the opinions proffered in the debate have ignored the substantial amounts of specialized assets, specialized expertise, and specialized functions a resolution authority – including the FDIC – reauires to effectively resolve failed institutions on a moment’s notice. The FDIC was constructed in the Great Depression in part to concentrate those assets and that knowledge and expertise in one place. As architects of those changes knew at the time, destroying that competency would place the system we are trying to save at unnecessary risk.

Working as an economist in the FDIC is very different from working as an economist in other regulatory agencies like OCC and the Federal Reserve. While economists at other agencies work primarily with bank reports of condition and income and other regulatory data like Y-9’s and Federal Reserve surveys, FDIC economists have available to them all manner of Wall Street data sources documenting industry price information on a wide variety of typical (and sometimes not so typical) bank collateral. As a visiting scholar at the FDIC in 2006-2007, I could not help but notice that the FDIC maintained subscriptions to commercial mortgage industry data, whole loan auction data, and even ABS and CDO pricing data well before the crisis. Those data subscriptions are expensive, each potentially costing tens thousands of dollars each month. But the FDIC resolutions department has to maintain those subscriptions and up-to-the-minute market knowledge in order to stand ready to resolve any failed institution for any reason.

FDIC staff maintain specialized expertise in working with that market data and each providers’ proprietary interface. It can take many months working directly with the data and the provider to get up to speed, and staff sometimes need to attend vendor training courses to learn new vendor resource capabilities. FDIC staff rely critically on that expertise when they successfully mark bank assets for sale in a resolution, sometimes over the course of a weekend in which a bank is closed on Friday and in the hands of a new owner on Monday. FDIC staff work even more closely with auction vendors and related resources when they liquidate assets outright, especially when valuing differing levels of put-backs or guarantees from various bidders.

In the event assets are put back to the FDIC, staff has to manage the assets, sometimes becoming servicer for the loans and managing collections. FDIC staff stand ready to manage bridge bank institutions in order to preserve franchise value by demonstrating going concern value and growing deposits. In short, FDIC staff preserve – and sometimes even generate additional – value through their resolution authority and expertise.

 The problem with many of today’s proposals is that the FDIC’s capabilities are not easily replicated. Consider just the brief experience of the Resolution Trust Corporation, where – even relying on FDIC staff to manage many Thrift resolutions – repeated Congressional budget holdups effectively prevented the RTC from generating franchise value like the independently-funded FDIC. Congress held up RTC appropriations for twenty-one months after April 1, 1992 seeking to direct asset sales to favored constituencies. Without funding or authority, the RTC could not resolve assets during that period, roughly doubling conservatorship losses to the RTC after the agency restarted activity in 1993. (RTC, Office of Research and Statistics, “The History of RTC Funding.” Unpublished document, cited in Managing the Crisis: The FDIC and RTC Experience, 1980-1994, Washington, DC: Federal Deposit Insurance Corporation, August 1998)

In fact, the problem lately hasn’t been the source of resolution authority, but primary regulators reluctant to place institutionsinto resolution. Treasury Office of Inspector General Material Loss Reviews are showing a pattern of forbearance much like that applied by regulators in the Thrift crisis, with similar results. If anything, the FDIC – our centralized resolution authority – needs enhanced authority to seize banks and resolve them before value is destroyed during regulatory forbearance. The FDIC already resolves banks for other regulatory institutions, like state bank authorities. I see no impediment to the FDIC resolving bank holding company assets for the Federal Reserve, as well – if the Federal Reserve is really ready to fail them.