Sifting through SIFIs

Suppose that a systemically important financial institution (the official designation, now in true DC style the acronym SIFI) actually fails.  Do we get a financial crisis?  Are owners/creditors punished for endangering the economic system or partly/largely bailed out by loans/transfers from taxpayers?  A few days ago here in Chicago, the acting chair of the FDIC, Martin Gruenberg, spoke to the Chicago Fed about how the FDIC would “systemic resolve” a failing SIFI without endangering the financial system while actually placing losses on those who own and are owned by the institution.  Speech here.

 

I am glad the work is proceeding.  If, . . oops I mean . . . when we end up in the next financial crisis, we will at least have a plan.  And an ex ante plan may help reduce the frequency of crises.  As  Gruenberg said, “developing a credible capacity to place a systemically important financial institution into an orderly resolution process is essential to subjecting these companies to meaningful market discipline. “

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How to Have a Successful Failure

Recommended reading: The upcoming FDIC quarterly contains a fantastic article on how, if Dodd-Frank were law then, Lehman Brothers might have been liquidated in a more orderly  and rapid fashion after its failure. The article is a nice summary of the events leading up to the Lehman failure, the relevant provisions of the Dodd Frank Act, and a description of how these would have been implemented in the case of Lehman.  I learned a number of things about how the financial regulation will look going forward. Something I did not know from Dodd-Frank’s orderly liquidation process is that “The Dodd-Frank Act provides that the FDIC may borrow funds from the Department of the Treasury, among other things, to make loans to, or guarantee obligations of, a covered financial company or a bridge financial company to provide liquidity for the operations of the receivership and the bridge financial company.” At least according to current law, any losses on this mini-bailout are born by the industry, not the taxpayer.

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