FDIC Chief Says US Ready If Big Wall Street Bank Ever Failed

(Bloomberg) — The head of the Federal Deposit Insurance Corp. says the US would be prepared to handle any collapse of a major Wall Street bank. 

FDIC Chairman Martin Gruenberg on Wednesday laid out a blueprint for how regulators would deal with such a failure and seek to minimize costs. He discussed preparations for a hypothetical scenario rather than any immediate threat.

US regulators, including the FDIC, have faced pressure to bolster their preparedness since the sudden demise of Silicon Valley Bank in March 2023. Meanwhile, the plight last year of Credit Suisse Group AG highlighted the tough decisions that officials would have to make if a US global systemically important bank ever faltered.

Such a “failure will be extraordinarily challenging under any circumstances,” Gruenberg said in remarks prepared for a speech at the Washington-based Peterson Institute for International Economics. “We believe we have the authorities, resources and capabilities to do the job if it becomes necessary.”

Gruenberg and other US officials have consistently said that the banking industry is sound, and he didn’t discuss any concerns in that area in his remarks. 

Instead, Gruenberg focused his attention on how regulators would exercise the authority they received after the financial crisis to resolve a bank in an orderly manner without the bankruptcy process. Gruenberg said the process hadn’t yet been tested and did have risks.

“However, an orderly resolution is far more preferable to the alternatives, particularly the alternative of resorting to taxpayer support to prop up a failed institution or to bail out investors and creditors,” he said. 

Also on Wednesday, the FDIC released a report about the so-called Title II authority to wind down a global systemically important bank.

In September, the agency’s inspector general said the FDIC had made some progress in implementing its Orderly Liquidation Authority program. However, the internal watchdog also said the regulator hadn’t been as focused as it should have been in the effort. 

The inspector general said at the time that if the FDIC couldn’t resolve a systemically important firm, “the banking sector and the stability of the US and global financial systems could be severely affected.”

The FDIC got additional authorities after the financial crisis to step in and resolve a flailing banking giant. Officials haven’t yet had to use those powers, but on Wednesday Gruenberg spelled out what could happen in such a scenario. He emphasized how regulators could move quickly to resolve an entire bank in a matter of months, rather than the years that traditional bankruptcy could take.

To wind down a Wall Street giant, the FDIC could, among other things, remove the failed firm’s board of directors and senior executives if they are deemed to be “substantially responsible,” Gruenberg said. It could also claw back compensation, he said. US officials have the ability to set up a so-called bridge financial company to replace the failed firm’s parent to tap the US Treasury for a temporary liquidity backstop, Gruenberg added.

(Updates with Gruenberg comments in final two paragraphs.)

©2024 Bloomberg L.P.