How MetLife Forces The FRB And FDIC To Fix The Way Big Banks FailVW Staff
Karen Shaw Petrou’s memorandum to Federal Financial Analytics clients on how MetLife forces the FRB and FDIC to fix the way big banks fail.
How MetLife Forces The FRB And FDIC To Fix The Way Big Banks Fail
TO: Federal Financial Analytics Clients
FROM: Karen Shaw Petrou
DATE: April 15, 2016
Wednesday’s living-will decisions demonstrate the point I made in last week’s memo: the MetLife case is a watershed decision not in terms of what regulators are allowed to do under Dodd-Frank, but rather the way they must do it to ensure that bank regulators abide by the rule of law now that the courts have been asked to read it. Leaving aside what the FRB and FDIC said, the way they said it on Wednesday is light years ahead of the 2014 pronouncements. Accompanying the agencies’ decision this time was a thirty-page memorandum going through each and every prior statement that sheds some light on how the resolution-planning process works. The only problem I have with the memo is that, despite its detail, none of it proves that the FRB and FDIC were in fact converts to the due-process cause before MetLife awakened them to the risks of running afoul of the Administrative Procedure Act. If the agencies really mean to sanction any of the GSIBs that flunked this year, they will need to ensure that the next round of rulings is far better justified. More importantly, if they mean to put in place a resolution system that works under both bankruptcy and OLA, they should come out from their big black boxes and describe not just how resolution plans will be judged, but what they will do if any are actually deployed.
The FDIC has been remarkably unhelpful explaining just how it would handle SIFIs in extremis. Three years after Dodd-Frank created the OLA systemic-resolution process, the FDIC in 2013 finally proposed how it might deploy a single-point-of-entry (SPOE) strategy if it were ever called upon to initiate an OLA resolution. As of this writing, there’s still no determinative statement, let alone a final rule that affords a measure of regulatory discipline and market certainty.
More confusing still, the FDIC has signaled in various forums – some public, most not – that it now knows that SPOE won’t always work. As a result, it is considering multiple-point-of-entry (MPOE) approaches, but no one outside its inner circle knows just what these might be.
That inner circle is pretty small – some former agency officials now pursuing a lucrative resolution-plan practice, a tight group of FDIC folk, and a few big banks that have trotted out MPOE for inspection (although none of them I know thinks it’s learned all that much). In fact, even the FDIC itself seems a bit confused – as our client report yesterday on the systemic committee’s meeting made clear, the staff took heavy fire on both bankruptcy and OLA resolutions and more than occasionally concurred with its critics.
During the discussion, FDIC staff described some pretty important points – for example, GSIBs are supposed to assume that all their counterparties adhere to automatic stays. Problem is, this isn’t the actual case outside a voluntary big-bank commitment and long-promised FRB rules to make it so have yet to show themselves. This is a classic case of opacity in which banks are held hostage to regulatory aspirations about best practice without any formal statement telling them what it is.
It’s not just GSIBs that suffer when critical planks of the systemic framework are as buried and splintered as the resolution protocols. Without any clear understanding of what’s expected of their big-bank counterparties and creditors, markets will naturally do their damnedest to arbitrage them. The automatic-stay issue is a perfect case in point – why should buy-side asset managers put aside their qualms and agree to this if they don’t think they have to? Even more critically, why wouldn’t the market think GSIBs are still TBTF since they have no rulebook to consult that shows them why a big-bank failure would put them at real risk? A major reason regulators have kept their resolution protocols so secret is that they aren’t all that confident in them, but putting a brave face on the end to TBTF without backing it with substance will badly backfire.
Indeed, it already has. What strikes me most about the press coverage following the Wednesday living-will decision is how so many headlines characterized the largest U.S. banks as “TBTF banks.” Earnings statements and other coverage also continued this sobriquet. In short, big banks have been branded not as GSIBs or even as what each of them is on its own, but as a collective group of TBTF brigand banks that needs still greater sanction. The more big banks are synonymous with TBTF, the more the markets will make it so and the harder it will be for the FDIC and FRB to do anything about it.