Better Markets, issued three comment letters sent to the Federal Reserve (Fed) and the Federal Deposit Insurance Corporate (FDIC) related to resolution plans for large banks and living wills for domestic and foreign firms.
Why It Matters. The failures, contagion, chaos, costs, and bailouts of Silicon Valley Bank, First Republic Bank, and Signature Bank earlier this year did not have to happen, should not have happened, and would not have happened if they had current, workable resolution plans. Such planning, especially for large banks, is critically important to prevent those banks from endangering the entire financial system and the American public. A banking crisis was narrowly averted last spring, but at a direct cost of more than $34 billion in bailouts as well as indirect costs of lost GDP, increased cost of borrowing, and depositor flight that made the already unacceptable too-big-to-fail problem even worse.
What We Said. The spring 2023 bank failures clearly showed that the current resolution planning process is a failure. Large banks must be held accountable for preparing and maintaining robust resolution plans, with enough information to prevent a default or a GSIB (global systemically important bank) takeover, as occurred with JPMorgan’s acquisition of First Republic. Furthermore, banking regulators must strengthen their own capabilities to engage frequently and constructively with banks throughout the resolution planning process. Our comment letters support the FDIC and Fed proposals, but also detail several critical improvements that are needed to better protect the financial system and the American people and prevent more taxpayer-funded bailouts.
Silicon Valley Bank and First Republic Bank illustrate the failures and deficiencies of the current resolution process. Both banks had filed resolution plans several months ahead of their failures, but the FDIC had not yet even reviewed these plans before the banks failed. Signature Bank’s first resolution plan filing was scheduled for June 2023, three months after it failed. All three of these examples prove that a lack of adequate information and planning can be extremely damaging, not just to the bank, but to the country as a whole. All large banks simply must be required to have current resolution plans that include a failure scenario, a resolution strategy that maintains depositor access to funds, and a valuation to facilitate the least costly resolution. The banking regulators must also frequently assess all plans for financial stability impact as well as accuracy and reasonableness.
Bottom Line. The transparency of resolution plans and living wills must also be dramatically increased. Currently, the public versions of these documents are sparsely populated and generally provide less information than already-public 10-K or quarterly Call reports. By increasing public disclosure, financial market participants and the American public will have the information required to exert appropriate market discipline on firms and independently assess the regulators’ determination of plan credibility. Additionally, the regulators should develop an independent committee to advise and support resolution efforts.