A top bank regulator issued a vote of confidence in the post-crisis banking rules Thursday, saying that a megabank failure today would be handled without the kind of crisis that accompanied the collapse of Lehman Bros. in 2008.
The claim, made by Federal Deposit Insurance Corporation Chairman Martin Gruenberg, is at odds with the pronouncements of other members of his agency and is likely to rankle Wall Street critics who interpreted the FDIC’s recent rejection of banks’ “living wills” as a sign that banks are not yet able to fail safely.
“In my view, we are at a point today that if a systemically important financial institution in the United States were to experience severe distress, it would be resolved in an orderly way,” Gruenberg said at a conference in Amsterdam, according to text released by the agency.
In a major caveat, Gruenberg said he thought a firm could fail without prompting a crisis through one of two means: Bankruptcy or the liquidation authority regulators have under the 2010 Dodd-Frank financial reform law.
There is a major difference between the two. The goal of the reforms instituted under President Obama was to make it so that a failing bank could undergo bankruptcy without sparking a panic. The regulatory authority to take over and safely wind down a firm was meant as a backstop — one that some lawmakers, especially Republicans, have argued amounts to a potential bailout, although the costs of the restructuring would be recouped through fees on megabanks.
Either way, Gruenberg’s comments are different in tone from those from regulators in recent days.
Last week, the FDIC and Federal Reserve said that five megabanks do not have adequate plans in place to restructure through the bankruptcy code and that another three of the eight U.S. banks identified as potential systemic risks had problems with their plans.
The “living wills” written by the five banks to spell out exactly how they would restructure and pay out owners were not credible, the regulators ruled.
Thomas Hoenig, the vice chairman of the FDIC, said the result meant that “the goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal.”
The living wills exercise is meant to ensure that banks could go through bankruptcy. In the case of a real-world panic, the regulators’ liquidation authority would remain an option. But that is not comfort to legislators critical of Wall Street.
Elizabeth Warren, for example, the Massachusetts senator who has pushed hard for stricter regulation of banks, responded to the news by calling it “scary” and argued that the rejection of the living wills showed the need for greater political pressure on Wall Street.
