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81–391 PDF 2013

S. HRG. 113–29 

IMPROVING CROSS-BORDER RESOLUTION TO BETTER PROTECT TAXPAYERS AND THE ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

NATIONAL SECURITY AND INTERNATIONAL TRADE 

AND FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ACTIONS OF THE FDIC TO IMPROVE CROSS-BORDER 

RESOLUTION OF ANY FAILING, GLOBALLY ACTIVE FINANCIAL INSTITUTION 

MAY 15, 2013 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON NATIONAL SECURITY AND INTERNATIONAL TRADE AND FINANCE

MARK R. WARNER, Virginia, Chairman 

MARK KIRK, Illinois, Ranking Republican Member 

SHERROD BROWN, Ohio 

JOE MANCHIN III, West Virginia 

JERRY MORAN, Kansas 

MILAN DALAL, Senior Economic Adviser 

STEPHEN KEEN, Republican Professional Staff Member 

(II)

C O N T E N T S 

WEDNESDAY, MAY 15, 2013 

Page 

Opening statement of Chairman Warner .............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Kirk ..................................................................................................... 4 

WITNESSES 

James R. Wigand, Director, Office of Complex Financial Institutions, Federal 

Deposit Insurance Corporation ........................................................................... 5 

Prepared statement .......................................................................................... 23 

Responses to written questions of: 

Senator Kirk .............................................................................................. 34 

Michael S. Gibson, Director, Division of Banking Supervision and Regulation, 

Board of Governors of the Federal Reserve System .......................................... 6 

Prepared statement .......................................................................................... 28 

Responses to written questions of: 

Senator Kirk .............................................................................................. 35 

William C. Murden, Director, Office of International Banking and Securities 

Markets, Department of the Treasury ............................................................... 7 

Prepared statement .......................................................................................... 31 

(III)

(1) 

IMPROVING CROSS-BORDER RESOLUTION TO 

BETTER PROTECT TAXPAYERS AND THE 

ECONOMY 

WEDNESDAY, MAY 15, 2013 

U.S. SENATE, 

SUBCOMMITTEE ON NATIONAL SECURITY AND INTERNATIONAL

TRADE AND FINANCE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 2:06 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Mark R. Warner, Chairman of the 

Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN MARK R. WARNER 

Chairman WARNER. I call to order this hearing of the National 

Security and International Trade and Finance Subcommittee, titled 

‘‘Improving Cross-Border Resolution to Better Protect Taxpayers 

and the Economy’’. I appreciate Senator Kirk’s willingness to join 

me in calling this important hearing today. 

I said, Senator Kirk, to the witnesses before you got here that 

I can think of very few issues that have more potential dramatic 

effect upon the international financial standings and trying to 

make sure that we do not see a repeat of the crisis that took place 

back in 2008. 

I also see that since it is a relatively complex issue, we have 

managed to scare away all of our colleagues and the press and everyone else. But we are going to pursue what I think is a very important issue here. 

I have got an opening statement, and then I will call on my 

friend and colleague Senator Kirk, and then we will get to the witnesses. 

Resolving a failing, globally active financial institution in real 

time—and I cannot stress enough the requirement of thinking 

about this in real time—across multiple jurisdictions without triggering systemic risk or a Lehman-style domino effect remains perhaps the most outstanding concern after the passage of DoddFrank. I think all of us remember those dark days in the fall of 

2008 when the collapse of Lehman and the bailout of AIG triggered 

global panic. It froze our capital markets and reverberated 

throughout the economy, causing a spike in unemployment not 

seen since the Great Depression and, frankly, a spike in unemployment that we have still not recovered from. 

2 

Filing on a Sunday evening, Lehman was put into bankruptcy. 

Anyone observing this process, including the thousands of American customers who were still waiting for the access to their approximately $50 billion in assets, knows that status quo approach 

of putting that internationally complex institution into bankruptcy 

on a Sunday night was not a model we want to see repeated. 

The crisis also demonstrated the critical need for enhanced coordination between regulators of our world’s largest economies. Obviously, Lehman and some of these other institutions reflect the 

fact that these major significant financial institutions are not by 

any means limited in terms of their national status. 

In the aftermath of the global crisis, Congress moved to overhaul 

the regulatory structure, updating regulations for the 21st century 

economic landscape. Now in Title I and Title II of Dodd-Frank, 

which I was proud to work with my friend Senator Corker on, we 

tried to design a system that would ensure taxpayers are protected 

from losses caused by the failure of large global institutions. 

Now, our design—and this was something we spent a lot of time 

on back during those days of debate of Dodd-Frank—was to try to 

ensure that bankruptcy would remain the preferred resolution approach, and that is again where we put in part of Title I the requirement that the living wills—or funeral plans, depending on 

your perspective—provision, I think it is extraordinarily essential. 

And one of the questions I look forward to asking our witnesses 

today is: Have those plans and the process of implementing those 

living wills, has that met our goal of trying to make sure that these 

large complex institutions on the vast majority of cases are prepared and organized in a structure that could allow them to go 

through a bankruptcy process? 

But we also recognize that particularly in the event when there 

was a crisis coming with an extraordinarily complex institution 

that could be systemically important not just to our economy but 

to the global economy, that we might need in effect a Plan B. And 

Dodd-Frank offers regulators another procedure to put a failing, 

globally active institution out of business via Orderly Liquidation 

Authority in Title II. 

Now, Congress made clear that these authorities were to be used 

only in instances involving a threat to the financial stability of the 

U.S. economy. Even then, Dodd-Frank laid out multiple steps before this liquidation authority could be invoked. 

One was that routine regulators—one route regulators are discussing to resolve systemically important financial institutions, if 

they were to use this OLA, or this resolution authority, involves a 

so-called single point of entry which would have the FDIC enter a 

financial institution at the holding company level and be able 

through that top-down approach, rather than coming at all the various branches, through that top-down approach transfer the good 

assets, those assets that are systemically important to not disrupting the overall United States or international economy, allow 

those good assets to be transferred to a new entity while keeping 

equity and some debt in the old entity. 

Now, again, let me be clear, at least in terms of my views, and 

I think Senator Corker’s views. We wanted to make sure that resolution would be such a dreadful process that no rational manageVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
3 

ment team would ever prefer that option, so we ensured that if the 

regulators were forced to use the Title II resolution authority, the 

shareholders would be wiped out, culpable senior management 

fired, and the new entity would be recapitalized by converting longterm debt to equity. 

Now, after taking writedowns, creditors of the old entity would 

still have a claim on the new entity, which would continue to operate to avoid a Lehman-esque freeze in the marketplace, which, 

again, as we know, proved to be very much of a disorderly dissolution. The critical element in this process must be accomplished, and 

let me stress this, without exposing taxpayers to liability. 

Now, as the FDIC considers the orderly liquidation process, it 

must coordinate with foreign regulators to efficiently implement 

the wind-down for these financial institutions. In December, the 

FDIC published a joint paper with the Bank of England outlining 

a united approach to resolution, and, again, I think it is important 

for the record to note that in excess of 80 percent of American 

banks’ foreign operations are based in the U.K. So if we can get 

the U.K. and the United States on the same page, we take a giant 

step forward in this process. 

Among other things, Bank of England officials stated they would 

be comfortable with allowing the FDIC to resolve an American 

bank’s subsidiary operations in London in the event of failure. 

Again, an important good first step. 

This is obviously a huge move forward, which, if properly accomplished, will create certainty for the marketplace, and I hope this 

progress can continue with other jurisdictions. I look forward to 

hearing from Treasury as well as other witnesses on the progress 

of this coordination. 

A couple final points. In mid-December, the Federal Reserve proposed new rules to govern the operations of foreign banking organizations in the United States. Again, we have to think about not 

only American banking operations abroad but those large foreignbased operations with their operations here in the United States. 

Under the proposed rules, the largest foreign banks would be required to create an intermediate holding company, essentially creating a structure to how U.S. banks operate under a bank holding 

company, trying to make sure that we can, in effect, if we had to 

do a resolution of a foreign-based operation here in the United 

States, there would be a similar structure. Foreign banks in the 

U.S. would be required to hold the same level of capital as American banks, and the foreign banks with assets in excess of $50 billion will be required to undergo heightened prudential regulations, 

such as stress testing, just as American banks are required to do. 

Another important step would be to ensure that—this would be 

very important, I think, to ensure that those foreign banks, should 

they have to go through resolution, that American interests are 

protected. 

Again, I am eager to hear from our witnesses today about how 

this rule interacts with the broader efforts of the FDIC to pursue 

a single-point-of-entry mechanism and what further progress we 

need to make not only with the U.K. but with our other foreign nations. 

4 

This is an issue of enormous importance if we are going to avoid 

the potential disorderly process that we saw in 2008, and I look forward to hearing from all of our witnesses today. 

So, with that, I will ask Senator Kirk if he would like to make 

an opening statement. 

STATEMENT OF SENATOR MARK KIRK 

Senator KIRK. Thank you, Mr. Chairman. I am thrilled that you 

are convening this hearing, and this is my first appearance as a 

Ranking Member. I believe I am the only Senator who was a 

former employee of the World Bank Group and very much care 

about the issues under the jurisdiction of this Subcommittee. And 

I have pledged to work with you to recall the role of the international financial institutions as Washington, DC, employers to 

make sure that that little-known role of Washington, DC, as a financial center, where I do not think most people realize how many 

countries’ fates are decided in the boardrooms of the World Bank 

and IMF right here in town. 

Chairman WARNER. Absolutely. Well, I appreciate that, Senator 

Kirk, and let me assure you that no one brings a better appreciation of the interconnectedness of our financial institutions than 

somebody with Senator Kirk’s experience, and he and I are friends, 

and we are going to be good partners on this Subcommittee. I again 

look forward to working with you. 

I have a lot of questions. I know Senator Kirk does as well, so 

let us get to the witnesses. Our three witnesses, I will introduce 

each of you, and then we will go down the row. 

Jim Wigand is the Director of FDIC’s Office of Complex Financial 

Institutions and overseas contingency planning for resolving and 

the resolution of systemically important financial companies. Prior 

to assuming this position in December 2010, Mr. Wigand was Deputy Director for Franchise and Asset Marketing Division of Resolutions and Receiverships, FDIC, and oversaw the resolution of failing insured financial institutions and the sale of their assets. Mr. 

Wigand, welcome. 

Mr. Michael Gibson is the Director of Banking Supervision and 

Regulation at the Federal Reserve Board. As Division Director, he 

oversees the Fed’s Department of Bank Regulatory Policy and its 

supervision of banking organizations. He represents the Fed on the 

Basel Committee on Banking Supervision and works closely with 

officials from U.S. and international Government agencies on bank 

oversight issues. Welcome, Mr. Gibson. 

And Mr. William Murden has been the Director of the Office of 

International Banking and Securities Markets at the U.S. Department of Treasury since September 1996. He is responsible for developing and proposing policies to senior Treasury officials on a 

wide range of international regulatory matters, including financial 

stability and reforms to the international financial regulatory system. Mr. Murden has served as a negotiator for all six G20 summits. Welcome, Mr. Murden. 

So, with that, I will get our witnesses started. Mr. Wigand, you 

are first up. 

5 

STATEMENT OF JAMES R. WIGAND, DIRECTOR, OFFICE OF 

COMPLEX FINANCIAL INSTITUTIONS, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. WIGAND. Chairman Warner and Ranking Member Kirk, 

thank you for holding this hearing on the important subject of 

cross-border issues involved in the resolution of a systemically important financial institution with international subsidiaries and affiliates. The hearing is timely, and I appreciate the opportunity to 

update the Subcommittee on the progress we have made with our 

foreign counterparts in addressing many of these issues. 

The financial crisis that began in late 2007 highlighted the complexity of the international structures of many of these large, complex financial institutions and the need for international cooperation if one of them became financially troubled. The Dodd-Frank 

Act requires the FDIC to coordinate, to the maximum extent possible, with the appropriate foreign regulatory authorities with respect to the resolution of systemically important financial institutions having cross-border operations, or G–SIFIs. 

The FDIC, working with our foreign colleagues, has made substantial progress in one of the most challenging areas of the financial reforms adopted in the Dodd-Frank Act. Cross-border issues 

presented by the prospect of or the occurrence of a G–SIFI failure 

are complex and difficult. The authorities granted to the FDIC 

under Title I and Title II of the Dodd-Frank Act provide a statutory framework to address these important issues. 

In mid-April, 2013, the FDIC and Board of Governors issued 

guidance to institutions that filed resolution plans under Title I of 

the Act in 2012. The guidance makes clear that, in developing their 

2013 plans, the institutions must consider and address impediments to the resolution in a rapid and orderly manner under the 

Bankruptcy Code, including cross-border issues. Firms will need to 

provide a jurisdiction-by-jurisdiction analysis of the actions each 

would need to take in a resolution to address ring fencing or other 

destabilizing outcomes, as well as the actions likely to be taken by 

host supervisory and resolution authorities. 

Title II provides a backup authority to place a holding company, 

affiliates of an FDIC-insured depository institution, or a nonbank 

financial company into a public receivership process if no viable 

private sector alternative is available to prevent the default of the 

financial company and a resolution through the bankruptcy process 

would have serious adverse effects on financial stability in the 

United States. 

The FDIC’s single-point-of-entry strategy for conducting a resolution of a SIFI under Title II would provide for such an orderly resolution of one of these entities. Under this strategy, shareholders 

would be wiped out, unsecured debt holders would have their 

claims written down to absorb any losses that shareholders cannot 

cover, and culpable senior management would be replaced. At the 

same time, critical operations provided by the financial company 

would be maintained, thereby minimizing disruptions to the financial system and the risk of spillover effects. This strategy is consistent with the approaches under consideration by a number of 

our foreign counterparts. 

6 

As I detail in my written statement, we are actively engaged in 

bilateral discussions with key jurisdictions that cover 27 of the 28 

G–SIFIs. For example, the FDIC and the Bank of England have 

been working to develop contingency plans for the failure of G– 

SIFIs that have operations in both the U.S. and the U.K. Approximately 70 percent of the foreign-reported activity of the eight U.S. 

SIFIs emanates from the U.K. 

In addition, the FDIC is coordinating closely with authorities of 

the European Union and Switzerland. We also have been engaged 

in discussions with resolution authorities in Japan and Hong Kong 

and have been actively engaged in a number of multilateral initiatives on resolution planning. 

Through these efforts, we have made substantial progress in establishing mechanisms for the sharing of information and for coordination with respect to the resolution of G–SIFIs operating in 

our respective jurisdictions. Bilateral and multilateral engagement 

with our foreign counterparts in supervision and resolution is essential as the FDIC develops resolution plans for individual U.S.- 

based G–SIFIs. Cross-border cooperation and coordination will facilitate the orderly resolution of a G–SIFI. 

Thank you again for the opportunity to discuss the FDIC’s efforts 

to address the issues regarding the failure of a large, complex financial institution with international operations. While much work 

remains to be done, the FDIC is better positioned today to address 

the failure of one of these institutions, and we remain committed 

to the successful implementation of this important objective of the 

Dodd-Frank Act. 

Chairman WARNER. Thank you, Mr. Wigand. 

Mr. Gibson. 

STATEMENT OF MICHAEL S. GIBSON, DIRECTOR, DIVISION OF 

BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. GIBSON. Chairman Warner, Ranking Member Kirk, I appreciate the opportunity to testify today on cross-border resolution. My 

written testimony discusses the improvements that have been 

made in the last few years in the underlying strength and resiliency of the largest U.S. banking firms. I would like to focus my 

oral remarks on what has been and remains to be accomplished in 

facilitating a cross-border resolution. 

Congress and U.S. regulators have made substantial progress 

since the crisis in improving the process for resolving systemic financial firms. We saw in the crisis that policy makers, when faced 

with a systemically important firm approaching failure, needed an 

option other than a bailout or a disorderly bankruptcy. In response, 

Congress created the Orderly Liquidation Authority, OLA, a statutory mechanism for the orderly resolution of a systemic financial 

firm. 

In many ways, OLA has become a model resolution regime for 

the international community, as shown by the ‘‘Key Attributes of 

Effective Resolution Regimes’’ document that was adopted by the 

Financial Stability Board in 2011. Thanks to OLA, the United 

States already meets the core requirements of this new global 

standard for special resolution regimes. 

7 

The Federal Reserve supports the progress made by the FDIC in 

implementing OLA, including in particular by developing a singlepoint-of-entry resolution approach. The single-point-of-entry approach is now gaining traction in other major jurisdictions. 

The Dodd-Frank Act requires all large bank holding companies 

to develop resolution plans and submit them to supervisors. The 

first wave plans were submitted to the Federal Reserve and the 

FDIC last summer. These plans are useful supervisory tools. They 

have helped the firms find opportunities to simplify corporate 

structures and improve management systems in ways that will 

help the firms be more resilient and efficient as well as easier to 

resolve. 

Internationally, the Federal Reserve has been an active participant in the Financial Stability Board’s many committees and technical working groups focused on cross-border resolution. The Federal Reserve has responsibility for convening U.S. and foreign prudential supervisors and authorities to form crisis management 

groups for the eight globally systemically important banks that are 

U.S. companies. These firm-specific crisis management groups meet 

regularly and work to identify and mitigate cross-border obstacles 

to an orderly resolution of these firms. 

Last year, the Federal Reserve sought public comment on a proposal that would generally require foreign banks with a large U.S. 

presence to organize their U.S. subsidiaries under a single intermediate holding company. The proposal would significantly improve our supervision and regulation of the U.S. operations of foreign banks and enhance the ability of the United States as a host 

country regulator to cooperate with a firm-wide global resolution of 

a foreign banking organization led by its home country authorities. 

Despite the meaningful progress that is being made internationally within the Financial Stability Board and in our domestic efforts with the FDIC, we still have more work to do to overcome the 

obstacles to a successful cross-border resolution of a systemic financial firm. There are several such obstacles, but perhaps the most 

important is that many other countries are still working to adopt 

a statutory resolution regime for their systemically important 

firms. 

Thank you for your attention, and I am pleased to answer any 

questions you may have. 

Chairman WARNER. Mr. Murden. 

STATEMENT OF WILLIAM C. MURDEN, DIRECTOR, OFFICE OF 

INTERNATIONAL BANKING AND SECURITIES MARKETS, DEPARTMENT OF THE TREASURY 

Mr. MURDEN. Chairman Warner, Ranking Member Kirk, Members of the Committee, as a civil servant who has been with the 

Treasury Department for over 30 years, it is a distinct privilege 

and honor for me to have the opportunity to testify here today. I 

am also pleased that my children, Robert and Mariah, have joined 

me today and are sitting several rows behind me. 

Chairman WARNER. I am sorry you only got one Senator, but it 

is an important issue, and we are glad you are here. 

[Laughter.] 

8 

Mr. MURDEN. Yes. But my children are here I think both to see 

how the topic is of interest to Congress as well as trying to figure 

out what their father does for a living. 

The financial crisis demonstrated that instability can result from 

the failure of global financial institutions. As a result, G20 leaders 

agreed in 2009 to develop frameworks and tools to effectively resolve these institutions and turned to the Financial Stability 

Board, or FSB, to oversee this effort. 

The FSB in turn laid out an approach that consisted of the three 

key elements: 

First, a new international standard for resolving both global systemically important financial institutions, known as G–SIFIs, as 

well as other financial institutions; 

Second, an assessment process to ensure that countries implement the new international standard consistently; 

And, third, a framework to resolve G–SIFIs that includes individual crisis management groups, or CMGs. 

The FSB established a Resolution Steering Group, chaired by 

Bank of England, to oversee the development and implementation 

of this framework. I represent the U.S. Treasury on this group and 

am joined by representatives from the Federal Reserve and the 

FDIC. 

Much progress has been made on this framework, and I would 

like now to quickly summarize that. 

One, the Resolution Steering Group developed a new international standard, called the ‘‘Key Attributes of Effective Resolution Regimes for Financial Institutions’’, which the G20 leaders endorsed in November 2011. The key attributes provide over 100 specific recommendations, including resolution authorities and powers, 

recovery and resolution planning, resolution funding, segregation of 

client assets, cross-border cooperation, and information sharing. 

Two, assessment. The IMF and the World Bank, as Senator Kirk 

mentioned earlier, in cooperation with the FSB, have launched a 

pilot project to test the key attributes in two jurisdictions. The FSB 

has recently completed its first peer review to measure its members’ progress in implementing the key attributes. This peer review 

found that while the United States is leading the globe in implementing its resolution regime, progress is occurring elsewhere, including in France, Germany, the Netherlands, Switzerland, the 

U.K., and Japan. The European Union is also working to finalize 

its own bank resolution regime, which all 27 member States will 

then have to implement. The experience with the recent bank failures in Cyprus has refocused attention within Europe on the importance of a banking union with an effective resolution framework. 

Three, national authorities have also made important progress in 

enabling the resolution of individual firms. CMGs have been established for all 28 G–SIFIs. Each CMG is developing recovery and 

resolution plans for its G–SIFI and is negotiating cooperation 

agreements among the national authorities that oversee its institutions’ important operations. 

While much has been accomplished, there is still more to do: 

first, encouraging foreign jurisdictions to implement effective resolution frameworks to facilitate cross-border resolution; second, fiVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
9 

nalizing resolution cooperation agreements between the key national authorities that are relevant for the G–SIFI; and, third, establishing strong lines of communication among relevant national 

authorities. 

So, in conclusion, the financial crisis made clear that the failure 

of large, international financial firms can result in systemic damage that crosses national borders. The FSB is playing a vital role 

in bringing domestic and foreign regulators together to build the 

capacity, trust, and communication necessary to make possible the 

effective resolution of systemic financial institutions. 

Thank you again for the opportunity to testify before the Committee today, and I welcome any questions the Senator and Chairman may have. Thank you. 

Chairman WARNER. Well, thank you, and I look forward to raising questions with all of you, but also perhaps, Mr. Murden, some 

questions that will further elucidate to your kids what you do. 

[Laughter.] 

Chairman WARNER. Let me just start with you, Mr. Gibson, and 

this is not exactly on topic, but a bit of an editorial comment but 

related. Obviously, one of the things we have to do as we think 

about our American SIFI institutions is the fact that those institutions need to have either more capital or convertible debt at the 

holding company level to make sure that in the event of a failure, 

there are appropriate assets there to absorb losses and protect taxpayers through a resolution process. And if we are going to do the 

single point of entry through the bank holding company, the bank 

holding company has got to have enough assets at that top layer 

to have that. 

Now, can you give us a little bit of update on how far the Fed 

is coming on formulating those requirements for the bank holding 

company level? 

Mr. GIBSON. Sure. We have identified that for the single-pointof-entry resolution strategy to be effective, there does have to be 

enough debt at the holding company level that could be converted 

into equity and used to recapitalize the company after the resolution. So we have discussed the fact that we are considering making 

such a proposal, and right now what we are working on is the technical details that would make it a specific proposal. Obviously one 

question is how much would be the minimum requirement, and 

really there the question is how much is necessary to really give 

confidence to the market and the foreign regulators as well as domestic regulators that it is enough. 

Also, what type of debt, should it be subordinated debt, should 

it be senior debt, should it be explicitly tagged as convertible debt? 

Or should we just identify a complete tranche of, say, senior unsecured debt? So these are the parameters that we are discussing internally. 

We are also discussing with our foreign counterparts the idea 

that it might make sense for other countries to institute a similar 

requirement. If we are all going to be using the single-point-ofentry strategy as one of our preferred resolution strategies, then we 

all have the same need to have enough debt at the holding company level. And so we have begun those discussions with our international counterparts, and the timing of whether we in the U.S. 

10 

propose something or whether we work a little bit more internationally is still a little bit uncertain. But that is what we are 

working on right now. 

Chairman WARNER. Well, I would just say that a number of my 

colleagues—and I will be sending you some correspondence on this 

matter as well—continue to believe that for our largest institutions 

they need to have sufficient capital standards, perhaps increasing 

above what has been proposed so far, and kind of a cousin to that 

is this additional debt held at the holding company level, again, to 

help absorb—if we are going to use the single point of entry, there 

has got to be enough assets up there to get us through this period 

until whatever succeeding institution or entity can continue. So I 

will be anxious and be watching on how you go forward on that. 

Just again following up with you, Mr. Gibson, but also Mr. 

Murden or Mr. Wigand, you may want to weigh in as well, I think 

it is a—it seems to me a rational approach that you have proposed 

for trying to create for foreign operations kind of a U.S. equivalency 

with this sense of that holding company structure with enough, 

again, debt at the American sub-holding company so that American 

interests can be protected. I guess I would have the question for 

any of the panel, but also Mr. Wigand on this: Do you see any potential conflict if the FDIC is actually going to be doing the mechanics of the resolution with the proposal for the foreign banking 

operations? And kind of a corollary to that is, if we ask our foreign 

partners to put more debt at their American sub-level, you know, 

I would imagine we would also have to be prepared for then our 

foreign parties to require more debt from our American institutions 

in their responsive host countries. So if you could take both of 

those on? 

Mr. GIBSON. Sure. So maybe I will start. In what we proposed 

in our foreign bank proposal in December, we proposed that foreign 

banking organizations in the U.S. would have to set up an intermediate holding company for their U.S. subsidiaries, and we proposed that we would apply the same capital requirements that we 

currently apply to U.S. bank holding companies. So it would be 

equal treatment within the U.S. 

We have not proposed that there would be any extra layer of 

debt for the U.S. intermediate holding company. We have not proposed that for the U.S. firms yet either. Currently our thinking is 

the extra layer of debt to facilitate the single point of entry would 

have to be at the top-most level only. So depending on how the foreign companies are structured, they may not need that extra layer 

of debt at their U.S. intermediate holding company as long as they 

have enough capital and liquidity to meet the requirements that we 

have proposed. 

Mr. WARNER. But are you saying that—does that not additional 

layer of debt have to be inside the American sub at some point? Or 

can it still be left over abroad? 

Mr. GIBSON. There are many different ways to do it, but one way 

that we are actively considering is to make sure that as long as the 

foreign regulator has enough debt at their parent and as long as 

we have the assurance that the U.S. operations will be protected 

in a global single-point-of-entry resolution, then we might not require it to be in the U.S. as long as we have the comfort and coVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
11 

operation with the foreign regulator. If we did not have that, then 

we might very well need more—— 

Mr. WARNER. At the American? 

Mr. GIBSON. At the American. 

Chairman WARNER. And, Mr. Wigand, does that pose any conflict 

or problem for you from the resolution piece? 

Mr. WIGAND. No, it does not. We view the Fed’s proposal as being 

primarily a supervisory tool which facilitates the ability of the Federal Reserve to oversee the operations of these companies, which 

have significant operations outside of the U.S. And, accordingly, 

the ability for the Fed to see clearly the interconnections between 

the U.S. operations and the home jurisdiction is facilitated with the 

ability to maintain asset and liquidity domestically. The collateral 

benefit of that is it may, of course, avoid the need for the U.S. operation to have to go through a resolution process because of the 

maintenance of adequate capital and liquidity within the hosted operations here in the U.S. 

In the event that the parent company has to go into a resolution 

process, the requirements that would be imposed under the Fed 

proposed rule would in many respects facilitate the home jurisdiction’s ability to conduct a single-point-of-entry resolution because 

the capital and liquidity requirements of those hosted operations 

here would already be satisfied. The Federal Reserve and another 

supervisor domestically would not need to impose additional requirements during this period of distress. 

As far as a resolution process goes, to the extent that we need 

to implement any type of domestic resolution proceeding, whether 

that be a bankruptcy process, an FDI Act process, an OLA process, 

a State receivership process, we believe that the rule does not negatively impact and may facilitate the ability of that authority to actually go through that process. 

Chairman WARNER. Well, we have got to be sure that there is 

enough at the foreign holding company level to protect the American interest as well so that they are not simply taking care of 

their own respective domestic challenges in a preference over 

American creditors. 

Mr. WIGAND. And that is, I believe, what is behind the capital 

and liquidity requirements or net asset maintenance requirements 

specifically associated with the proposal. 

Chairman WARNER. And, Mr. Murden, this may be a chance for 

you to weigh in on are there concerns from kind of the Treasury 

standpoint and from your activities with the G20 that there may 

be reciprocal requirements from our—on American institutions who 

have large holdings in foreign nations? 

Mr. MURDEN. Our perspective on that is that many countries in 

Europe have already implemented stronger capital requirements, 

Switzerland in particular. U.K. has proposals that would strengthen capital requirements for all their banks, including their subs of 

U.S. financial institutions. Germany has authorities to require additional capital for their foreign subs. They have already taken that 

action in relation to Italy. 

So I think if you look at what Europe has in place, I am told by 

my foreign regulator counterparts in Europe that they have decided 

to impose Basel requirements on broker-dealers, whether they are 

12 

owned by U.S. firms or by European banks or stand-alone. So they 

have the provision already to take stronger measures. 

The Financial Stability Board has also endorsed a framework 

proposed by the Basel Committee that would permit host countries 

to impose higher capital requirements on all banks, including foreign banks in their jurisdictions. 

Chairman WARNER. So there has not been any pushback from 

American institutions saying this is going to require them to deposit more debt at their foreign sub-level in a Spain, in an Italy, 

in—— 

Mr. MURDEN. I have not heard that particular complaint from 

U.S. financial institutions. 

Chairman WARNER. OK. One of the things I find curious is that 

even before we see the completion of the living wills process, which 

I share, again, some frustration that we are 4 years after the fact 

and the process is not completed, and I understand it is complex, 

but that some of our colleagues, particularly in the House, are talking about, you know, doing away with Title II, doing away with 

this potential resolution authority. And I just am curious whether 

any of you think within the current state of bankruptcy law, 

whether we would be prepared under existing bankruptcy law to 

resolve any of these large institutions without the threat of a Lehman-style freeze-up with the current status quo. Again, I would be 

happy to take each of your comments. 

Mr. WIGAND. Of the companies that have to submit living wills 

and that are subject to the provisions of Title I, the vast majority 

of them actually should be resolvable through bankruptcy. However, there is a significant subset of those—the largest, most complex firms—where bankruptcy poses significant obstacles. 

In the 2013 guidance the Federal Reserve Board and the FDIC 

issued to these companies for their resolution plans, we specifically 

are asking the institutions to address how through the bankruptcy 

process these obstacles, or we refer to them as ‘‘benchmarks,’’ can 

be overcome. Among those issues, obviously cross-border, the subject of this hearing today, is a significant issue. However, one has 

to consider, as one observed in the Lehman insolvency process, 

multiple competing insolvencies, which are likely to take place in 

differing jurisdictions. 

We have to consider also the operational and interconnectedness 

challenges within an enterprise as different subsidiaries of one of 

these large, complex institutions will be dependent on other affiliates for the provision of services or perhaps liquidity. 

Additionally, we have concerns associated with the actions of 

counterparties, the termination of derivatives contracts and massive close out and fire sale of collateral that we observed. Finally, 

there is a significant challenge associated with the funding and liquidity requirements that one would see in the bankruptcy process, 

as well as might occur in an OLA type of resolution. In order to 

mitigate the fallout or systemic consequences arising from the insolvency proceeding, liquidity has to be provided so that the critical 

operations that financial firm provided to the financial system can 

be maintained and continuity of services can basically be provided. 

We are requesting these firms to address these issues specifically, and given the differing business models that we observe with 

13 

these companies—and we have universal banks, for example, we 

have broker-dealers, we have processing banks. Each one of these 

firms is going to have to take a look at these issues and address 

them in a manner that makes a credible argument that bankruptcy 

can be applied to an insolvency process—and which does not result 

in the type of negative consequences to the financial system that 

we observed with Lehman. Those particular impediments we are 

using as benchmarks to make that type of assessment, at the end 

of the day has to be an institution-by-institution analysis. 

Mr. GIBSON. I think the premise of your question in focusing on 

existing bankruptcy laws means that my answer has to be, as I 

said in my statement, that we need a choice between existing bankruptcy laws and bailout, which the OLA provides. That does not 

mean that the changes we are pushing the firms to make through 

the living will process to improve their ability to be resolved, those 

changes, many of them will make them more resolvable under 

bankruptcy as well can be stabilized under Title II OLA. I still 

think there will be a need for a backstop of the OLA in those perhaps unforeseeable circumstances in the future where, even if we 

might expand the range of circumstances where bankruptcy is a 

viable option, there can always be a more severe crisis or a more 

severe situation where having that backstop of OLA will be an important option. 

Chairman WARNER. Mr. Murden. 

Mr. MURDEN. From an international perspective, I think I would 

like to say that when the Resolution Steering Group started developing the key attributes, working on those in the fall of 2010, there 

was considerable interest in Title II OLA and how that process 

worked. There was a lot of discussion with the Chairman of—the 

Bank of England Chairman and other countries on that group. And 

so they were very interested in adopting the key features of Title 

II OLA into the key attributes. So if you look at the key attributes 

today, there are many features that are similar that align with 

OLA. So the U.S. in that sense is leading from a position of 

strength in developing Title II OLA and is setting a model for other 

countries in the development of their resolution framework. 

Chairman WARNER. So it is safe to say, Mr. Murden, that if we 

look at our partner nations around the world who have also extraordinarily complex financial institutions, they are going the 

route as well of saying let us look at what we have done in Title 

II, use that as a model, not saying let us reject that and go to simply a bankruptcy-only process in their respective countries. Is that 

correct? 

Mr. MURDEN. That is right. I think that I would say they have 

adopted the notion that they need to have a special resolution regime for banks and are working to try to implement the key attributes in their countries along those lines. 

Chairman WARNER. And, again, while we want to get bankruptcy 

as far down the path as possible, we want to simplify these firms 

as much as possible to get them bankruptcy suitable. You know, I 

think we have all—or at least I believe, and I guess I would ask 

each of you, that by the nature of a designation of a SIFI, you are 

talking about something that is an institution that may have component parts that are important enough to the overall financial sysVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
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tem that some component part needs to continue, and if it needs 

to continue, you need to have some ability to both have the funding 

to have that continued, and even should you ever have to call 

upon—again, we hope never to be the case—some funding, that 

funding is then replenished not from the taxpayer but from the 

other SIFI firms. Is that not correct? 

Mr. WIGAND. That is correct, and I need to be clear—the expectation of the FDIC is that in using the single-point-of-entry process 

and the creation of a bridge financial company, which is well capitalized due to having an adequate amount of unsecured debt 

which would provide market confidence, that the ongoing operations that come out of this process would be viable. The use of the 

liquidity facility that is provided for the in the Dodd-Frank Act, the 

Orderly Liquidation Fund, would really only be a backstop. Our expectation is that the bridge financial company will borrow in the 

private market. It may have to pay a premium to do that, but that 

would be our expectation. The private markets would be a source 

of liquidity as well as to the extent that customary sources of liquidity were provided to the financial firm, those would be available as well. Only in the event of private sources and customary 

sources not being available to the bridge financial company would 

we then go to the Orderly Liquidation Fund as a source of liquidity 

to ensure the continuity of those critical operations to the financial 

system. Given the authority of the statute, we believe that just the 

issuance of guarantees probably would be sufficient, so then the 

bridge financial company could issue guaranteed debt which would 

be guaranteed by the OLF, or Orderly Liquidation Fund, similar to 

the debt guarantee program that was observed back in 2008 and 

2009, where financial companies issued debt that was guaranteed 

by the FDIC, but the market was very receptive to purchasing that 

type of debt. We believe that that would be also a preferable recourse to direct borrowing from the OLF. 

Chairman WARNER. Right. Which again, just to reiterate, that 

only comes to pass after shareholders are wiped out, after management is expunged, after, you know, long-term debt and unsecured 

creditors may be converted, and then, in effect, the remaining assets are borrowed against with a backstop guarantee; but, you 

know, to me that does not sound like a bailout. 

Mr. WIGAND. We would also ensure that any type of OLF borrowing is fully secured. Our expectation would be, as the law requires, any OLF borrowing is fully repaid from the assets of the 

firm, and there would be an overcollateralization requirement with 

that borrowing. In the highly unlikely event that the collateral was 

insufficient, then you go to the assessment of the industry. But at 

no one time would taxpayers be at risk. 

It is also important, as you noted, Chairman Warner, that this 

is a liquidity facility. It is strictly for the provision of liquidity. It 

is not for the provision of capital support. It is not to enhance the 

position of any former creditors of the failed institution. It is strictly a liquidity facility that we would expect to use as a backstop to 

private sector or customary sources. 

Chairman WARNER. A liquidity event to keep those—not the 

whole institution, but that is simply that critical component of that 

institution that is critical to the overall financial system. I really 

15 

do wish that more of my colleagues and maybe some of my House 

colleagues could hear this presentation. Maybe we could encourage 

them to hold a similar hearing because I think it might clear up 

some of the misunderstanding that I understand even was this 

morning a subject of a hearing on the other side of the body. 

Does anybody want to add anything else on that subject? Mr. 

Gibson. 

Mr. GIBSON. The only thing I would add is that we can work to 

make firms more resolvable under bankruptcy, but we can never 

foretell what the macroeconomic or financial sector conditions are 

going to be at the time one of these firms gets into trouble. So 

bankruptcy might be a good option for Firm A if financial markets 

are relatively calm, but we might need the extra assurance of the 

OLA process with the FDIC overseeing that if financial conditions 

are really disorderly. 

Mr. WIGAND. To reiterate a point Mike is making, it is important 

to avoid the two choices that the Government had in 2008 of—a 

disorderly resolution process through—for example, a bankruptcy 

framework, or bailing out companies. Those two very negative—— 

Chairman WARNER. Bad and badder. 

[Laughter.] 

Mr. WIGAND. ——choices really should never be a situation in 

which policy makers find themselves again. Having a backstop option to a bankruptcy process such as OLA is important so that 

market discipline can be imposed onto the stakeholders of the firm 

and certainly OLA provides through its authority and, more importantly, through the strategic approach we have adopted at the 

FDIC, a single point-of-entry, where the shareholders and creditors 

of the firm that are at the top holding company level, that elect the 

board of directors, that appoint the management, that have allowed 

the firm to operate in the way it does, they bear the first consequences of those actions through the loss absorption and the 

writedowns that they are going to have to take. Culpable management, of course, is held accountable. The law specifically requires 

that culpable management cannot be retained. In addition to that, 

we are actually going one step further and looking at not only what 

would be deemed culpable management in terms of the law, but 

also what is necessary to move the company forward, or its parts 

forward, in a manner such that the market is confident that whatever comes out of this process as a going operation—and there 

might be multiple operations that come out of this process. We 

should not just think of this as a single company that emerges. 

There might be several—— 

Chairman WARNER. It sure as heck would not be the single— 

what comes out at the other end would not be the entity that goes 

in on the front—— 

Mr. WIGAND. Correct, absolutely. 

Chairman WARNER. This is the roach motel analogy we continue 

to use. You may check in, but whatever is checking out is not the 

same institution. 

Mr. WIGAND. It will be a different company or companies that 

come out of this process. 

Chairman WARNER. Companies, with different chances or different sets of shareholders, different sets of management. 

16 

Mr. WIGAND. Correct. The market has to be comfortable that 

whoever is in control or operating those entities will basically be 

able to move forward and did not cause the problems. 

Chairman WARNER. And the preface to all this, again, of course, 

will be—I am going to come to this. It is great not having any other 

Members here. I get to ask all my questions, which is that we are 

going to have a living will process set up so that those institutions 

that were so complex that the—again, our preference is bankruptcy, but that in the last crisis, bankruptcy just was not able to 

be used. If we do our job well on the front end with the living will 

process, the more rational choice for any entity will be to go 

through an orderly bankruptcy process. Our hope would be. 

Mr. WIGAND. We believe that is the case, that there are actually 

incentives associated with the bankruptcy process as compared to 

OLA, one actually being the provision or provisions associated with 

management that would incent a company to go forward with a 

bankruptcy process prior to the need for the Government to recognize the OLA as basically a backstop or last resort alternative. 

Chairman WARNER. Well, one of the—let us get to kind of drilling down to the next level. One of the things we saw with Lehman, 

and obviously with AIG as well, was the challenge. Last time, 

when we get into derivatives of counterparties, basically in the 

event of a collapse, taking that collateral and heading for the hills, 

you know, one of the things we put in Dodd-Frank—and I would 

be curious about each of your reactions to this. And this was a best 

effort. I am not sure it was the perfect solution set, but we put that 

24-hour stay so that there would be some ability to assess things 

so that we do not have this enormous crisis and flight of collateral. 

Right number, you know, less longer, right approach, comments? 

And, again, anybody on—— 

Mr. WIGAND. I will stay on this. The 24-hour stay provision is a 

very important one and mirrors a similar provision under the FDI 

Act that we have had for depository institutions. Under our single 

point-of-entry approach, the holding company goes into the resolution process, and the operating subsidiaries, where the vast majority of these contracts reside, of course, maintain their honoring of 

those contracts because the subsidiaries remain as going concerns. 

Where this becomes an important issue is if the holding company 

acted as either a guarantor for those contracts—and there is a default provision upon an insolvency process for a guarantor—or if 

the contract has a cross-default provision, so that even though the 

direct counterparty does not go into an insolvency process, it is 

cross-defaulted to any affiliate of that party or parent if it goes into 

an insolvency process. That is where the provision comes into utility because we would anticipate that these operating companies 

would be moved essentially into this bridge financial holding company as part of the overall strategy. 

Of course, the law only goes as far as our borders. It does not 

apply internationally. We have to look at the types of contracts 

that are originated extraterritorially as to whether or not they reference U.S. law. If they do not, what would the financial incentives 

be for those counterparties to exercise any type of acceleration and 

termination provisions on those contracts. 

17 

That is a problem for us. It is a problem for any other jurisdiction as well that is looking at resolving systemically important 

companies that go across borders. 

An international effort would serve the global financial community well in this regard. A change to the standard form contract 

would help if a similar type of provision, such as a 24-hour stay, 

were adopted so that all financial companies, whether domestic or 

foreign, had a provision similar to what we observe in Dodd-Frank 

that would allow basically for the assumption of these contracts by 

a creditworthy counterparty and avoid immediate termination or 

acceleration of them. 

Chairman WARNER. Mr. Gibson and Mr. Murden, do you want to 

comment on that? Because I know as well there are some concerns 

being raised now from some of our foreign friends, the potential 

reach of Dodd-Frank around this issue and around derivatives, and 

I would like to get your comments. 

Mr. MURDEN. Yeah, I can comment on internationally, this is an 

important issue, and in the Resolution Steering Group as we were 

discussing the key attributes, there was a lot of interest from the 

Bank of England Chair and other members in the Dodd-Frank provision, and so there is a temporary stay, is one of the key attributes that countries have committed to implement. 

The European Commission has drafted—— 

Chairman WARNER. And is there a sense that the 24-hour is the 

right amount of time? Is that the general—— 

Mr. MURDEN. They use the same provision from Dodd-Frank, so 

that is—24 hours is what the consensus was in that group. And, 

accordingly, when the European Commission drafted their Recovery and Resolution Directive, which is their implementation of a 

resolution framework, they do have that provision in there. We are 

monitoring the various stages of that directive as it goes through 

its legislative process, but it is currently—I am told it is currently 

adequate in terms of giving it the temporary stay. 

Chairman WARNER. Mr. Gibson. 

Mr. GIBSON. You are definitely right to identify derivatives as 

one of the challenges for cross-border resolution being effective, and 

we do have a multifaceted approach to reducing derivatives risk in 

our financial reform program. We are requiring that all standardized derivative contracts be cleared through a central counterparty, 

and that uncleared derivative contracts have margin requirements 

so that there is some collateral there. Those are both part of the 

G20 financial reform program, and we expect that those will be implemented worldwide. So that will reduce the scope of the problem 

of derivatives, although there will still be some remaining. 

And as Jim mentioned, there are a couple different approaches 

that we are pursuing internationally on the cross-border derivatives issues. I would broadly characterize those as changing law or 

changing the contracts. Changing the law means getting the stay 

that you cited that we have in our U.S. law, the 24-hour stay, getting that in the foreign resolution regimes that are currently being 

introduced, and have some mutual recognition, so one country’s regime could create a stay globally for that country’s failing institution. 

18 

The other is change the contract so these cross-default or guarantee from the holding company aspects of the contracts are not 

there, and then the automatic triggers on the derivatives will not 

automatically happen. 

Right now we are pursuing both strategies, and there is still 

some work to do to make that effective. 

Chairman WARNER. Well, I guess one of the questions I have as 

well, you know, it sounds like we are proceeding apace. Again, 

many of us, recognizing the complexity in the variety of jurisdictions—since we cannot even get all of domestic Dodd-Frank regulations out 4 years later, I understand that it is more complex. And 

it seems—and correct me if I am wrong—that the consensus testimony is, you know, great progress made with the U.K., which, 

again, takes care of—and I think you said, Mr. Wigand, my number may have been wrong at 80 percent. It may have been more 

like 70 percent of American-based foreign banking operations in 

the U.K. And, Mr. Murden, you said other areas are moving forward both on resolution authority, they are modeling themselves 

after our Title II, not a bankruptcy-only process, growing recognition around this issue of derivatives, which I still have enormous 

concerns about. But how vulnerable are we or how vulnerable is 

the international financial system in this interim period before our 

worldwide colleagues get their resolution authority, get their processes in place? 

Mr. GIBSON. We have made a lot of progress not only in having 

the Title II Orderly Liquidation Authority and the many steps the 

FDIC has already taken to build that out, but we have a stronger 

financial system, more capital in our banks, banks generally—— 

Chairman WARNER. More capital in our banks and hopefully the 

Fed even moving further on that shortly. 

Mr. GIBSON. Strengthening the capital in the banks to make the 

likelihood of a need for resolution more remote is an important part 

of what we have done, and that is where we are right now. We still 

have work to do before we are going to be comfortable, but we have 

made a lot of progress. 

Chairman WARNER. I am not sure that was an answer about how 

vulnerable—but, still, the question of—I understand the progress 

we have made, but are we vulnerable from a foreign institution? 

There are large foreign institutions, European banks that may not 

have been as well as perhaps our Swiss friends or our British 

friends who, you know, could have enormous challenges, that are 

internationally significant if there is not a resolution authority. 

How high on our alert—I do not want us to go back to the homeland security red, yellow, orange, whatever the other color codes 

are, but how concerned should we be as policy makers about the 

fact that we are still in this interim period? 

Mr. WIGAND. I would say domestically we have made significant 

progress with respect to thinking through how we would use the 

statutory authority we were granted under Dodd-Frank as well as, 

as Mike indicated, lowering the probability that domestic companies would ever need to be resolved under that authority. By increased capital requirements, to think of Dodd-Frank is that it has 

provisions that lower the probability that a company would fail and 

then it also has provisions that lower the cost to the financial sysVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
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tem upon that failure. Significant progress has been made domestically on both of those fronts, although there is certainly more work 

to do. 

On the international front, I would characterize the shift in the 

dialogue regarding resolving systemically important financial companies, whether they are domestic or foreign jurisdiction is the 

home jurisdiction for the company, as one which has markedly 

shifted from what it was prior to the crisis to what it is today. 

Rarely does a week go by in which I do not have contacts with foreign counterparts, either on a supervisory side or resolution authority side, with not just one or two but maybe even three or four 

foreign supervisors and/or resolution authorities. And that type of 

dialogue and discussion just did not occur prior to this financial crisis, and those on a bilateral basis. But as Bill indicated, there are 

quite a few multilateral initiatives which have also improved the 

dialogue and discussion around this point. 

There is a lot of work to be done, but I would also characterize 

it as the progress has been rather significant from where we were 

back in 2008. 

Chairman WARNER. Mr. Murden, and you may—I would like you 

to specifically address whether the recent challenges in Cyprus has 

kind of a little more urgency to this. 

Mr. MURDEN. Right, right. So just first to build off what Jim 

said, you know, we are better placed than we were in 2007, 2008, 

and I think the fact that all 28 G–SIFIs have a crisis management 

group now, and when the regulators now know each other, know 

who they are, so if a major financial—one of these G–SIBs got into 

trouble tomorrow, you know the foreign regulators account for the 

bulk of that financial institution—— 

Chairman WARNER. But can I interrupt just for a second? 

Mr. MURDEN. Yes. 

Chairman WARNER. I appreciate what you are saying, but if one 

of these G–SIBs were in a country that did not have a resolution 

authority, you would know who to call. 

Mr. MURDEN. Right. 

Chairman WARNER. But would your counterparty in the other 

country have a process to know how to resolve or deal with the institution? 

Mr. MURDEN. So these 28 G–SIFIs, they are from 10 countries. 

Altogether 16 of them are from Europe and 8 from the United 

States, 4 from Asia. All of those countries, with the exception of 

China, have some type of resolution framework in place. It may not 

be ideal. In the case of the U.K., for instance, they passed theirs 

in 2009 and it does not apply to nonbanks. Japan is passing theirs, 

but they have something to address banks. 

So in terms of the 28 G–SIBs that are covered, it may not be elegant, but we are covered in that respect in terms of knowing how 

to resolve it and knowing who your counterparts are. 

In other countries, in Cyprus, for instance, which does not have 

any G–SIBs, but it did have banks that were very important systemically—in fact, Cyprus shows—one of the lessons from that 

shows what happens when banks become too large. The Cyprus 

banking system was six times the size of GDP. And it also shows 

how the structure of banks’ liabilities can matter. They had very 

20 

little sub debt, very little unsecured credit in terms of bailing in. 

So they ended up initially haircutting insured depositors, which 

caused panic and runs and capital controls. 

And so I think that has rekindled interest in Europe on why an 

orderly resolution framework is important, and the finance ministers in Europe met just yesterday to make progress on an orderly 

resolution framework on their Resolution and Recovery Directive. 

Chairman WARNER. Are there any benchmark timelines we 

should look to? 

Mr. MURDEN. So I would look to the—June 20th is another meeting of the finance ministers working on the Recovery and Resolution Directive. The European legislative process is very complicated. I do not pretend to be an expert. It actually involves three 

different groups, not two, as the United States. It involves the European Commission, the European Parliament, and the European 

Council of Ministers. 

Chairman WARNER. It may be the only process that makes the 

U.S. Congress looks speedy. 

[Laughter.] 

Mr. MURDEN. That is right. That is right. And so they are—modifications to this legislation have to be resolved in something called 

the ‘‘trilogue,’’ but we expect it to be approved sometime this summer. There is great urgency in Europe to get this in place. This 

would only be phase one. This would require the 27 member States 

to adopt legislation in their own countries, and it would create 27 

resolution authorities. 

I think phase two, as Europe embarks on this banking union, 

and by summer 2014 has a single supervisor of their large banks, 

being the European Central Bank, I think they are working right 

now to try to figure out how to move toward a single European resolution mechanism to make that process more effective. 

Chairman WARNER. I really appreciate it. I have only got one 

more question, and it is going to be more for Mr. Wigand and Mr. 

Gibson. But we have spent a lot of time about resolution. We have 

spent a lot of time about challenges cross-border. I do think the notion and the progress made on single point of entry seems to be a 

logical, rational approach, and it does seem like we are trying to 

make sure at that holding level, bank holding company level, there 

is going to be an appropriate asset base to get us through this process. 

But we all know, you know, if we get another part of Dodd-Frank 

fully right, the chances of this will be even further diminished, and 

that is, using the enormous power that we granted the FDIC and 

the Fed in using these living will documents to make sure that 

these institutions are not too big to fail or too big to be put out 

business in a nonsystemically important way. And I know on April 

15th, the FDIC and the Fed published the kind of next iteration, 

editorial comment, and question, you know, there were many of our 

colleagues on both sides of the aisle who wanted to come into these 

institutions and purely on the virtue of size put an asset cap or 

other tools. I think the majority of us felt that the better way to 

try to put a price on size in terms of added capital and liquidity 

requirements, but also a much greater transparency on these institutions so that we could see the enormous interconnectedness of 

21 

some of these institutions and how they would go through some 

process of being wound down that would not destroy or harm our 

financial institutions or our overall economy. 

You know, I am personally hopeful that you will use those tools 

somewhat aggressively and demonstrate that both from a transparency standpoint and if there are examples where these institutions cannot be wound down appropriately through bankruptcy, 

that, you know, Title I gives you a lot of tools around these living 

wills. And I just would like to hear from both you gentlemen about, 

one, what you hope to see out of this next round of—I know you 

have got, I believe, five specific requirements you asked when we 

are going to get responses. When will we have this living wills 

process finished? 

Mr. WIGAND. We certainly take this exercise very seriously, and 

authority that the Congress gave the FDIC and the Fed reviewing 

these living wills, the resolution plans, funeral plans, and the provisions for consequences of finding these plans deficient and not 

having plans which would indicate that the company is resolvable 

in an orderly rapid manner through the bankruptcy process. As you 

noted, Chairman Warner, that we received the first set of plans in 

2012, and that was what I characterized as a learning experience 

for both the firms as well as the FDIC and the Fed. 

As a result of those submissions, we came out with our 2013 

guidance, which really sets forth some key benchmarks, difficult 

benchmarks, for these companies to address. These benchmarks 

would be applied to their specific business model, whether it be a 

universal bank, a broker-dealer model, or a processing bank. 

These are the key obstacles that would be presented in the bankruptcy process. Our expectation is that progress will be made, that 

the firms will take the guidance seriously and provide a robust 

analysis addressing these issues. If they do not, then the law provides provisions for the FDIC and the Federal Reserve Board to impose upon the companies to either minimize the prospect of—if the 

plans are found deficient, to either minimize the prospect of their 

failure through additional capital or liquidity requirements, or in 

the event that the companies still fail to produce a credible plan, 

ultimately divestiture of some of the business operations. That 

would occur after the statutory 2-year requirement. 

It remains to be seen the amount of progress the firms will demonstrate in their plan submissions from 2012 to 2013, but our expectation is that those key benchmarks need to be addressed, and 

if they are not—— 

Chairman WARNER. This year. 

Mr. WIGAND. This year, and then if the—the FDIC is certainly 

prepared—the FDIC Board is prepared to look at its authorities for 

remediating those. 

Mr. GIBSON. I think what a successful living will process would 

look like would be that, as we saw from 2012 to 2013—2012 was 

the first year the firms had submitted any plan, so there was, as 

Jim said, a lot of learning both by the firms and by the regulators 

as to how that was working. 

The guidance that we put out for the 2013 plans did have those 

five pretty significant things that we wanted the firms to do differently in this year’s plans compared with last year’s plans, obstaVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
22 

cles to address, things where we felt like there was more work 

needed. 

I think success would look like those changes from year to year 

start to shrink until really the plan is an effective plan for resolution under bankruptcy and we do not have to come in with big 

changes from 1 year to the next, but actually we feel like that we 

are comfortable with the plan. We should observe the changes from 

1 year to the next being smaller, with the obvious exception of if 

a firm goes through a merger or significant divestiture, then we 

would require them to revise their plan to take account of that. 

Chairman WARNER. Well, I would just simply say that I think 

progress has been made. I think this hearing has helped me in 

terms of also some sense of how we are doing vis-a-vis the rest of 

the world. I think it has also helped in terms of showing that the 

rest of the world is actually taking the model that we put forward 

in Dodd-Frank. I think particularly Mr. Wigand has laid out I 

think with some additional clarity how the resolution process, 

again, would not be the choice of any rational management team, 

that there is not a taxpayer liability, that there is a potential, in 

effect, credit enhancement to keep liquidity of that components of 

the firm that are systemically important. I think that is all important and helpful to me. Mr. Murden, I hope you have done a good 

job with your kids as well in terms of afterwards. But the only caution—and I say this as someone who knows, again, recognizing that 

our—I think everyone, regardless of what they feel about DoddFrank, which acknowledge that our financial institutions look 

much better than the rest of the world’s post-crisis, and consequently we are stronger for that. 

But, you know, we are 4 years after the fact, and it seems like 

we do not go 6 months without another crisis/scandal coming out 

of the banking industry and a growing concern from a great number of members from both sides of the aisle that, you know, this 

process is not moving fast enough or has not had enough teeth in 

it that we do not have both a stronger system, a less concentration—or that we have increased concentration, that we have continued concerns about the basic fairness of our system. And I cannot 

urge you both enough—and I think I understand to some degree 

at least the level of complexity of going through this, but I would 

urge you all due speed, because my fear would be for all the good 

work that has been done, we could be one scandal away from rash 

action that might look good politically but might not end up making both a stronger system, a more transparent system, and a system that would continue to allow not just the American economy 

but the world economy to continue on its recovery. 

But I thank all of the witnesses for very good testimony. Again, 

I wish more of my other colleagues were here. I do hope that we 

will share this with these colleagues, and some of our colleagues 

in the House who think a current bankruptcy system only might 

somehow solve the problem, I just fail to understand that. 

And, with that, I thank you again, all the witnesses. The hearing 

is adjourned. 

[Whereupon, at 3:25 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

23 

PREPARED STATEMENT OF JAMES R. WIGAND 

DIRECTOR, OFFICE OF COMPLEX FINANCIAL INSTITUTIONS, FEDERAL DEPOSIT

INSURANCE CORPORATION

MAY 15, 2013 

Chairman Warner, Ranking Member Kirk, and Members of the Subcommittee, I 

appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) regarding our progress in addressing cross-border issues involved 

in the resolution of a systemically important financial institution (SIFI) with international subsidiaries and affiliates. 

The financial crisis that began in late 2007 highlighted the complexity of the 

international structures of many of these large, complex financial institutions and 

the need for international cooperation if one of them became financially troubled. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

requires the FDIC to coordinate, to the maximum extent possible, with the appropriate foreign regulatory authorities with respect to the resolution of SIFIs having 

cross-border operations. 

Title I and Title II of the Dodd-Frank Act provide significant new authorities to 

the FDIC and other regulators to address the failure of a SIFI. All large, systemic 

financial companies covered under Title I must prepare resolution plans, or ‘‘living 

wills,’’ to demonstrate how the company would be resolved in a rapid and orderly 

manner under the Bankruptcy Code in the event of the company’s material financial 

distress or failure. Requiring SIFIs to explain their interactions with foreign authorities during a resolution is a key element of the plans. 

While bankruptcy remains the preferred option, Title II provides a back-up authority to place a holding company, affiliates of an FDIC-insured depository institution, or a nonbank financial company into a public receivership process, if no viable 

private sector alternative is available to prevent the default of the financial company and a resolution through the bankruptcy process would have serious adverse 

effects on financial stability in the United States. Establishing and maintaining 

strong working relationship with our cross-border counterparts will be critical, 

should the Title II authorities ever need to be invoked. The FDIC and other regulators have been actively working with our international counterparts to coordinate 

resolution strategies for globally active systemically important financial companies 

(G–SIFIs). 

My testimony will provide greater detail about the authorities available to the 

FDIC to address the failure of a SIFI and how they improve our ability to manage 

such failures on an international basis. In addition, it will describe the significant 

progress we have made with our foreign colleagues in one of the most challenging 

areas of the financial reforms adopted since the recent crisis. Although much has 

been accomplished, more work remains. 

Resolving a Systemically Important Financial Firm 

Title I—‘‘Living Wills’’ 

Bankruptcy is the preferred resolution framework in the event of a SIFI’s failure. 

To make this prospect achievable, Title I of the Dodd-Frank Act requires that all 

bank holding companies with total consolidated assets of $50 billion or more, and 

nonbank financial companies that the Financial Stability Oversight Council (FSOC) 

determines could pose a threat to the financial stability of the United States, prepare resolution plans, or ‘‘living wills,’’ to demonstrate how the company could be 

resolved in a rapid and orderly manner under the Bankruptcy Code in the event 

of the company’s financial distress or failure. This requirement enables both the 

firm and the firm’s regulators to understand and address the parts of the business 

that could create systemic consequences in a bankruptcy. The living will process is 

a necessary and significant tool in ensuring that large financial institutions can be 

resolved through the bankruptcy process. 

The FDIC and the Federal Reserve Board issued a joint rule to implement Section 

165(d) requirements for resolution plans—the 165(d) Rule—in November 2011. The 

plans will detail how each covered company could be resolved under the Bankruptcy 

Code, including information on their credit exposures, cross guarantees, organizational structures, and a strategic analysis describing the company’s plan for rapid 

and orderly resolution. 

In addition to the resolution plan requirements under the Dodd-Frank Act, the 

FDIC issued a separate rule which requires all insured depository institutions (IDIs) 

with greater than $50 billion in assets to submit resolution plans to the FDIC for 

their orderly resolution through the FDIC’s traditional resolution powers under the 

Federal Deposit Insurance Act (FDI Act). This rule, promulgated under the FDI Act, 

24 

1 ‘‘Guidance for 2013 §165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Initial Resolution Plans in 2012’’, http://www.fdic.gov/regulations/reform/domesticguidance.pdf. 

complements the joint rule on resolution plans for SIFIs. The 165(d) Rule and the 

IDI resolution plan rule are designed to work in tandem by covering the full range 

of business lines, legal entities and capital-structure combinations within a large financial firm. 

The FDIC and the Federal Reserve review the 165(d) plans and may jointly find 

that a plan is not credible or would not facilitate an orderly resolution under the 

Bankruptcy Code. If a plan is found to be deficient and adequate revisions are not 

made, the FDIC and the Federal Reserve may jointly impose more stringent capital, 

leverage, or liquidity requirements, or restrictions on growth, activities, or operations of the company, including its subsidiaries. Ultimately, the FDIC and the Federal Reserve, in consultation with the FSOC, can order the company to divest assets 

or operations to facilitate an orderly resolution under bankruptcy in the event of 

failure. A SIFI’s plan for resolution under bankruptcy also will support the FDIC’s 

planning for the exercise of its Title II resolution powers by providing the FDIC 

with a better understanding of each SIFI’s structure, complexity, and processes. 

2013 Guidance on Living Wills 

Eleven large, complex financial companies submitted initial 165(d) plans in 2012. 

Following the review of the initial resolution plans, the agencies developed instructions for the firms to detail what information should be included in their 2013 resolution plan submissions. 1 The agencies identified an initial set of significant obstacles to rapid and orderly resolution which covered companies are expected to address in the plans, including the actions or steps the company has taken or proposes 

to take to remediate or otherwise mitigate each obstacle and a timeline for any proposed actions. The agencies extended the filing date to October 1, 2013, to give the 

firms additional time to develop resolution plan submissions that address the instructions. 

Resolution plans submitted in 2013 will be subject to informational completeness 

reviews and reviews for resolvability under the Bankruptcy Code. The agencies established a set of benchmarks for assessing a resolution under bankruptcy, including a benchmark for cross-border cooperation to minimize the risk of ring-fencing 

or other precipitous actions. Firms will need to provide a jurisdiction-by-jurisdiction 

analysis of the actions each would need to take in a resolution, as well as the actions to be taken by host authorities, including supervisory and resolution authorities. Other benchmarks expected to be addressed in the plans include: the risk of 

multiple, competing insolvency proceedings; the continuity of critical operations— 

particularly maintaining access to shared services and payment and clearing systems; the potential systemic consequences of counterparty actions; and global liquidity and funding with an emphasis on providing a detailed understanding of the 

firm’s funding operations and cash flows. 

As reflected in the Dodd-Frank Act, the preferred option for resolution of a large 

failed financial firm is for the firm to file for bankruptcy just as any failed private 

company would, without putting public funds at risk. In certain circumstances, however, resolution under the Bankruptcy Code may result in serious adverse effects 

on financial stability in the United States. In such cases, the Orderly Liquidation 

Authority set out in Title II of the Dodd-Frank Act serves as the last resort alternative and could be invoked pursuant to the statutorily prescribed recommendation, 

determination, and expedited judicial review process. 

Title II—Orderly Liquidation Authority 

Prior to the recent crisis, the FDIC’s receivership authorities were limited to federally insured banks and thrift institutions. The lack of authority to place the holding company or affiliates of an insured depository institution or any other nonbank 

financial company into an FDIC receivership to avoid systemic consequences severely constrained the ability to resolve a SIFI. Orderly Liquidation Authority permits the FDIC to resolve a failing nonbank financial company in an orderly manner 

that imposes accountability while mitigating systemic risk. 

The FDIC has largely completed the core rulemakings necessary to carry out its 

systemic resolution responsibilities under Title II of the Dodd-Frank Act. For example, the FDIC approved a final rule implementing the Orderly Liquidation Authority 

that addressed, among other things, the priority of claims and the treatment of 

similarly situated creditors. 

Key findings and recommendations must be made before the Orderly Liquidation 

Authority can be considered as an option. These include a determination that the 

25 

financial company is in default or danger of default, that failure of the financial 

company and its resolution under applicable Federal or State law, including bankruptcy, would have serious adverse effects on financial stability in the United States 

and that no viable private sector alternative is available to prevent the default of 

the financial company. To invoke Title II, the following would be required: 

1. a recommendation addressing the eight criteria set out in the Dodd-Frank Act 

and approved by two-thirds of the members of the Federal Reserve Board of 

Governors; 

2. a recommendation by either two-thirds of the members of the Securities and 

Exchange Commission (if the financial company or its largest U.S. subsidiary 

is a securities broker or dealer), in consultation with the FDIC; or the Director 

of the Federal Insurance Office (if the financial company or its largest U.S. 

subsidiary is an insurance company), in consultation with the FDIC; or twothirds of the members of the FDIC Board of Directors (in the case of all other 

financial companies) also addressing the eight statutory criteria set out in the 

Dodd-Frank Act; and 

3. a determination by the Secretary of the Treasury, in consultation with the 

President, covering the seven statutory criteria set forth in section 203(b) of 

the Dodd-Frank Act. 

Following the culmination of the expedited judicial review process specified in section 202(a) of the Dodd-Frank Act, the FDIC is appointed receiver under Title II. 

If, however, the covered financial company is itself an insurance company, the resolution is conducted under applicable state law and the FDIC has backup authority 

to stand in the place of the appropriate state regulatory agency. 

Single Point-of-Entry Strategy 

To implement its authority under Title II of the Dodd-Frank Act, the FDIC has 

developed a strategic approach to resolving a SIFI which is referred to as Single 

Point-of-Entry. In a Single Point-of-Entry resolution, the FDIC would be appointed 

as receiver of the top-tier parent holding company of the financial group following 

the company’s failure and the completion of the recommendation, determination and 

expedited judicial review process set forth in Title II of the Dodd-Frank Act. Shareholders would be wiped out, unsecured debt holders would have their claims written 

down to reflect any losses that shareholders cannot cover, and culpable senior management would be replaced. 

The FDIC would organize a bridge financial company into which the FDIC would 

transfer assets from the receivership estate, including the failed holding company’s 

investments in and loans to subsidiaries. Equity, subordinated debt, and senior unsecured debt of the failed company would likely remain in the receivership and be 

converted into claims. Losses would be apportioned to the claims of former equity 

holders and unsecured creditors according to their order of statutory priority. Remaining claims would be converted, in part, into equity that will serve to capitalize 

the new operations, or into new debt instruments. This newly formed bridge financial company would continue to operate the systemically important functions of the 

failed financial company, thereby minimizing disruptions to the financial system 

and the risk of spillover effects to counterparties. 

The healthy subsidiaries of the financial company would remain open and operating, allowing them to continue business and avoid the disruption that would likely 

accompany their closings. Critical operations for the financial system would be 

maintained. Because these subsidiaries would remain open and operating as goingconcerns, counterparties to most of the financial company’s derivative contracts 

would have neither a legal right nor a financial motivation to terminate and net out 

their contracts. 

However, creditors at the subsidiary level should not assume that they avoid risk 

of loss. For example, if the losses at the financial company are so large that the 

holding company’s shareholders and creditors cannot absorb them, then the subsidiaries with the greatest losses will have to be placed into resolution, exposing those 

subsidiary creditors to loss. 

Under the Dodd-Frank Act, officers and directors responsible for the failure cannot be retained and would be replaced. The FDIC would appoint a new Chief Executive Officer and Board of Directors from the private sector to run the bridge holding 

company under the FDIC’s oversight during the first step of the process. 

During the resolution process, restructuring measures would be taken to address 

the problems that led to the company’s failure. These could include changes in the 

company’s businesses, shrinking those businesses, breaking them into smaller entities, and/or liquidating certain assets or closing certain operations. The FDIC also 

26 

2The Financial Stability Board is an international member organization established in 2009 

to develop and promote the implementation of effective regulatory and supervisory policies. 3 ‘‘Resolving Globally Active, Systemically Important, Financial Institutions’’. http:// 

www.fdic.gov/about/srac/2012/gsifi.pdf. 

would likely require the restructuring of the firm into one or more smaller nonsystemic firms that could be resolved under bankruptcy. 

The FDIC expects the well-capitalized bridge financial company and its subsidiaries to borrow in the private markets and from customary sources of liquidity. The 

new resolution authority under the Dodd-Frank Act provides a back-up source for 

liquidity support, the Orderly Liquidation Fund (OLF). If it is needed at all, the 

FDIC anticipates that this liquidity facility would only be required during the initial 

stage of the resolution process, until private funding sources can be arranged or 

accessed. Much like debtor-in-possession financing in a bankruptcy, the OLF can 

only be used for liquidity and would only be available on an over-collateralized fully 

secured basis. If any OLF funds are provided, the OLF must be repaid either from 

recoveries on the assets of the failed firm or, in the unlikely event of a loss on the 

collateralized borrowings, from assessments against the largest, most complex financial companies. The law expressly prohibits taxpayer losses from the use of Title II 

authority. 

In our view, the Single Point-of-Entry strategy holds the best promise of achieving 

Title II’s goals of holding shareholders, creditors and management of the failed firm 

accountable for the company’s losses and maintaining financial stability. 

Cross-Border Issues 

Addressing the issues associated with the resolution of G–SIFIs is challenging. 

Advance planning and cross border coordination will be critical to minimizing disruptions to global financial markets. Recognizing that G–SIFIs create complex international legal and operational concerns, the FDIC is actively reaching out to foreign 

host regulators to engage in dialogue concerning matters of mutual concern and to 

enter into bilateral Memoranda of Understanding in order to address issues associated with cross-border regulatory requirements, to gain an in-depth understanding 

of foreign resolution regimes, and to establish frameworks for robust cross-border 

cooperation and the basis for confidential information-sharing, among other initiatives. 

Coordination With the United Kingdom, the European Union, Switzerland, and 

Japan 

As part of our bilateral efforts, the FDIC and the Bank of England, in conjunction 

with the prudential regulators in our respective jurisdictions, have been working to 

develop contingency plans for the failure of G–SIFIs that have operations in both 

the U.S. and the U.K. Of the 28 G–SIFIs designated by the Financial Stability 

Board (FSB) 2 of the G20 countries, four are headquartered in the U.K, and another 

eight are headquartered in the U.S. Moreover, approximately 70 percent of the reported foreign activities of the eight U.S. G–SIFIs emanates from the U.K. The magnitude of these financial relationships makes the U.S.–U.K. bilateral relationship by 

far the most significant with regard to the resolution of G–SIFIs. As a result, our 

two countries have a strong mutual interest in ensuring that, if such an institution 

should fail, it can be resolved at no cost to taxpayers and without placing the financial system at risk. An indication of the close working relationship between the 

FDIC and U.K authorities is the joint paper on resolution strategies that the FDIC 

and the Bank of England released in December 2012. 3 This joint paper focuses on 

the application of ‘‘top-down’’ resolution strategies for a U.S. or a U.K. financial 

group in a cross-border context and addressed several common considerations to 

these resolution strategies. 

In addition to the close working relationship with the U.K., the FDIC is coordinating with representatives from other European regulatory bodies to discuss issues 

of mutual interest including the resolution of European G–SIFIs. The FDIC and the 

European Commission (E.C.) have established a joint Working Group comprised of 

senior executives from the FDIC and the E.C. The Working Group convenes formally twice a year—once in Washington, once in Brussels—with ongoing collaboration continuing in between the formal sessions. The first of these formal meetings 

took place in February 2013. Among the topics discussed at this meeting was the 

E.C.’s proposed Recovery and Resolution Directive, which would establish a framework for dealing with failed and failing financial institutions and which is expected 

to be finalized this spring. The overall authorities outlined in that document have 

a number of parallels to the SIFI resolution authorities provided here in the U.S. 

27 

4Financial Stability Board, ‘‘Implementing the Key Attributes of Effective Resolution Regimes—How Far Have We Come?’’ http://www.financialstabilityboard.org/publications/ 

rl130419b.pdf. 

5Financial Stability Board, ‘‘Key Attributes of Effective Resolution Regimes’’, http:// 

www.financialstabilityboard.org/publications/rl111104cc.pdf. 

under the Dodd-Frank Act. The next meeting of the Working Group will take place 

in Brussels later this year. 

The FDIC also has engaged with Swiss regulatory authorities on a bilateral and 

trilateral (including the U.K.) basis. Through these meetings, the FDIC has further 

developed its understanding of the Swiss resolution regime for G–SIFIs, including 

an in-depth examination of the two Swiss-based G–SIFIs with significant operations 

in the U.S. We have made substantial progress in establishing a strong framework 

for the sharing of information and for coordination with respect to the resolution 

of G–SIFIs operating in our respective jurisdictions. 

The FDIC has had bilateral meetings with Japanese authorities. In March 2013, 

FDIC staff attended meetings hosted by the Deposit Insurance Corporation of Japan 

to discuss the FDIC’s resolution strategy under the Orderly Liquidation Authority 

and the treatment of qualified financial contracts under the Dodd-Frank Act. That 

same month, the FDIC hosted a meeting with representatives of the Japan Financial Services Agency (JFSA) to discuss our respective resolution regimes. Representatives of the JFSA provided a detailed description of the current legislative proposal 

to amend Japan’s existing resolution regime to enhance authorities’ ability to resolve SIFIs. These bilateral meetings, including an expected principal level meeting 

later this year, are part of our continued effort to work with Japanese authorities 

to develop a solid framework for coordination and information-sharing with respect 

to resolution, including through the identification of potential impediments to the 

resolution of G–SIFIs with significant operations in both jurisdictions. 

To place these working relationships in perspective, the U.S., the U.K., the European Union, Switzerland, and Japan account for the home jurisdictions of 27 of the 

28 G–SIFIs designated by the FSB and the Basel Committee on Banking Supervision in November 2012. Progress in these cross-border relationships is thus critical 

to addressing the international dimension of SIFI resolutions. 

Multilateral Initiatives 

The FDIC also has been active in multilateral initiatives promoting international 

financial stability through the FSB—and in particular its efforts to establish greater 

cross-border resolution coordination—through the Resolution Steering Group, the 

Cross-border Crisis Management Group and a number of technical working groups. 

Additionally, the FDIC has been the cochair of the Cross-border Bank Resolution 

Group of the Basel Committee on Banking Supervision since its inception in 2007. 

Resolution regimes have been identified as a priority area by the FSB. In April 

2013, the FSB published the findings of the first Peer Review on Resolution Regimes. 4 The review, which was conducted by a team led by the FDIC, focused on 

compliance with international financial principles developed by the FSB and endorsed by the G20 for the key attributes of resolution. 5 The objectives of the review 

were to encourage consistent cross-country and cross-sector implementation; to 

evaluate (where possible) the extent to which standards and policies have had their 

intended results; and to identify gaps and weaknesses in reviewed areas and to 

make recommendations for potential follow-up (including via the development of additional principles) by FSB members. 

The FDIC also has evaluated information and strategies concerning G–SIFI resolution regimes prepared by U.S. and foreign authorities in the course of its involvement with multilateral cross-border initiatives, most notably the Crisis Management 

Group process established by the FSB, including efforts to develop resolvability assessments for individual G–SIFIs. These ongoing institution-specific resolution planning efforts have underscored the complex structure of the large G–SIFIs that may 

become subject to the FDIC’s Orderly Liquidation Authority. 

Conclusion 

In conclusion, the FDIC, working with our foreign colleagues, has made substantial progress in one of the most challenging areas of the financial reforms adopted 

in the Dodd-Frank Act. The cross-border issues presented by the failure of a G–SIFI 

with international operations are complex and difficult. The new authorities granted 

to the FDIC under Title I and Title II of the Dodd-Frank Act provide a statutory 

framework to address these important issues. While much work remains to be done, 

the FDIC is much better positioned today to address the failure of one of these institutions. 

28 

1See, www.financialstabilityboard.org/publications/rl111104cc.pdf. 

PREPARED STATEMENT OF MICHAEL S. GIBSON 

DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF

GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MAY 15, 2013 

Chairman Warner, Ranking Member Kirk, and other Members of the Subcommittee, I appreciate the opportunity to testify today on the challenges to achieving an orderly cross-border resolution of a failed systemic financial firm. In my remarks, I would like to first reflect on the improvements that have been made in 

the last few years in the underlying strength and resiliency of the largest U.S. banking firms, and then turn to a discussion of what has been accomplished and what 

remains to be accomplished in facilitating a cross-border resolution. 

A Look Back 

The recent financial crisis was unprecedented in its scope and severity. Some of 

the world’s largest financial firms nearly or completely collapsed, sending shock 

waves through the highly interconnected global financial system. The crisis made 

clear that our regulatory framework for reducing the probability of failure of systemic financial firms was insufficient and that Governments everywhere had inadequate tools to manage the failure of a systemic financial firm. 

Since 2008, the United States and the international regulatory community have 

made meaningful progress on policy reforms to reduce the moral hazard and other 

risks associated with financial firms perceived to be too big to fail. In broad terms, 

these reforms seek to eliminate too big to fail in two ways: (1) by reducing the probability of failure of systemic financial firms through stronger capital and liquidity 

requirements and heightened supervision, and (2) by reducing the costs to the 

broader system in the event of the failure of such a firm. My testimony today relates 

principally to the second of these two aspects of reform, but I want to begin by highlighting some of the material achievements we have made to reduce the likelihood 

of failure of systemic financial firms. 

The Basel III capital and liquidity reforms are the foundation of the global efforts 

to improve the resilience of the international banking system. These reforms are 

being implemented in the United States and elsewhere. In addition, the Federal Reserve has significantly strengthened its supervision of the largest, most complex financial firms since the financial crisis. For example, the Federal Reserve now conducts rigorous annual stress tests of the capital adequacy of our largest bank holding companies. As a result of these efforts, the overall strength of the largest U.S. 

banking firms has significantly improved. The aggregate tier 1 common equity ratio 

of the 18 largest U.S. banking firms has more than doubled, from 5.6 percent of 

risk-weighted assets at the end of 2008 to 11.3 percent at the end of 2012. In absolute terms, these firms have increased their aggregate levels of tier 1 common equity from just under $400 billion in late 2008 to almost $800 billion at the end of 

2012. Higher capital puts these firms in a much better position to absorb future 

losses and continue to fulfill their vital role in the economy. In addition, the U.S. 

banking system’s liquidity position relative to precrisis levels has materially improved. 

Accomplishments to Date on Cross-Border Resolution 

Congress and U.S. regulators have made substantial progress since the crisis in 

improving the process for resolving systemic financial firms. The core areas of 

progress include adoption and implementation of statutory resolution powers, adoption and implementation of resolution planning requirements, increased international coordination efforts, and the Federal Reserve’s foreign bank regulatory proposal. 

Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) created the Orderly Liquidation Authority (OLA), a statutory resolution mechanism designed to improve the prospects for an orderly resolution of a 

systemic financial firm. In many ways, OLA has become a model resolution regime 

for the international community. The Financial Stability Board (FSB) in 2011 adopted the ‘‘Key Attributes of Effective Resolution Regimes for Financial Institutions’’, 

a new standard for resolution regimes for systemic firms. 1 The core features of this 

global standard are already embodied in OLA. By acting early through the passage 

of the Dodd-Frank Act, Congress paved the way for the United States to be a leader 

in shaping the development of international policy for effective resolution regimes 

for systemic financial firms. 

29 

2 In a SPOE resolution under Title II of the Dodd-Frank Act, the FDIC is appointed as a receiver of the top-tier holding company to carry out the resolution of the company. 3See, Board of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Board Releases Proposed Rules To Strengthen the Oversight of U.S. Operations of Foreign Banks’’, press 

release, December 14, www.federalreserve.gov/newsevents/press/bcreg/20121214a.htm. 

The Federal Reserve supports the progress made by the Federal Deposit Insurance Corporation (FDIC) in implementing OLA, including, in particular, by developing a single-point-of-entry (SPOE) 2 resolution approach. SPOE is designed to 

focus losses on the shareholders and long-term unsecured debt holders of the parent 

holding company of the failed firm. It aims to produce a well-capitalized bridge holding company in place of the failed parent by converting long-term debt holders of 

the parent into equity holders of the bridge. The critical operating subsidiaries of 

the failed firm would be re-capitalized, to the extent necessary, and would remain 

open for business. The SPOE approach should work to significantly reduce incentives for creditors and customers of the operating subsidiaries to run and for hostcountry regulators to engage in ring-fencing or other measures disruptive to an orderly, global resolution of the failed firm. 

The Dodd-Frank Act requires all large bank holding companies to develop, and 

submit to supervisors, resolution plans. The largest U.S. bank holding companies 

and foreign banking organizations submitted their first annual resolution plans to 

the Federal Reserve and the FDIC in the third quarter of 2012. These ‘‘first-wave’’ 

resolution plans have yielded valuable information that is being used to identify, assess, and mitigate key challenges to resolvability under the Bankruptcy Code and 

to support the FDIC’s development of backup resolution plans under OLA. These 

plans are also very useful supervisory tools that have helped the Federal Reserve 

and the firms focus on opportunities to simplify corporate structures and improve 

management systems in ways that will help the firms be more resilient and efficient, as well as easier to resolve. 

Internationally, the Federal Reserve has been an active participant in the FSB’s 

work to address the challenges of cross-border resolutions. For example, the Federal 

Reserve, together with the FDIC, participated in the development of the ‘‘Key Attributes’’. We are also an active participant in the FSB’s many committees and technical working groups charged with developing policy guidance on a broad range of 

technical areas that affect the feasibility of cross-border resolution. Moreover, as the 

home-country supervisor of 8 of the 28 global systemically important banks (G– 

SIBs) identified by the FSB, the Federal Reserve has the responsibility of establishing and routinely convening for each U.S. G–SIB a crisis management group. 

These firm-specific crisis management groups, which are comprised primarily of the 

firm’s prudential supervisors and resolution authorities in the United States and 

key foreign jurisdictions, are working to mitigate potential cross-border obstacles to 

an orderly resolution of the firms. 

Last year, the Federal Reserve also sought public comment on a proposal that 

would generally require foreign banks with a large U.S. presence to organize their 

U.S. subsidiaries under a single intermediate holding company that would serve as 

a platform for consistent supervision and regulation. 3 Just as other countries already apply Basel capital requirements to U.S. bank subsidiaries operating in their 

countries, our proposal would subject the U.S. intermediate holding companies of 

foreign banks to the same capital and liquidity requirements as U.S. bank holding 

companies. We believe that the proposal would significantly improve our supervision 

and regulation of the U.S. operations of foreign banks, help protect U.S. financial 

stability, and promote competitive equity for all large banking firms operating in the 

United States. The proposal would enhance the ability of the United States, as a 

host-country regulator, to cooperate with a firm-wide, global resolution of a foreign 

banking organization led by its home-country authorities. 

Challenges Ahead on Cross-Border Resolution 

Despite the progress that is being made within the FSB and in our domestic efforts with the FDIC, developing feasible solutions to the obstacles presented by 

cross-border resolution of a systemic financial firm remains necessary and work toward this end is under way. The key remaining obstacles include (1) adopting effective statutory resolution regimes in other countries; (2) ensuring systemic global 

banking firms have sufficient ‘‘gone concern’’ loss-absorption capacity; (3) completing 

firm-specific cooperation agreements with foreign regulators that provide credible 

assurances to those host-country regulators to forestall disruptive ring-fencing; and 

(4) coordinating consistent treatment of cross-border financial contracts. 

First, although the United States has had OLA in place since 2010, and the FDIC 

has made good progress in developing the framework for using OLA over the past 

30 

3 years, most other major jurisdictions have not yet enacted national legislation that 

would create a statutory resolution regime with the powers and safeguards necessary to meet the FSB’s ‘‘Key Attributes’’. Mitigating the obstacles to cross-border 

resolution will, at a minimum, require key foreign jurisdictions to have implemented 

national resolution regimes consistent with the ‘‘Key Attributes’’. Therefore, we will 

continue to encourage our fellow FSB member jurisdictions to move forward with 

such reforms as quickly as possible. 

Second, key to the ability of the FDIC to execute its preferred SPOE approach 

in OLA is the availability of sufficient amounts of debt at the parent holding company of the failed firm. Accordingly, in consultation with the FDIC, the Federal Reserve is considering the merits of a regulatory requirement that the largest, most 

complex U.S. banking firms maintain a minimum amount of outstanding long-term 

unsecured debt on top of its regulatory capital requirements. Such a requirement 

could have a number of public policy benefits. Most notably, it would increase the 

prospects for an orderly resolution under OLA by ensuring that shareholders and 

long-term debt holders of a systemic financial firm can bear potential future losses 

at the firm and sufficiently capitalize a bridge holding company in resolution. In addition, by increasing the credibility of OLA, a minimum long-term debt requirement 

could help counteract the moral hazard arising from taxpayer bailouts and improve 

market discipline of systemic firms. Switzerland, the United Kingdom, and the European Commission are moving forward with similar requirements, and it may be 

useful to work toward an international agreement on minimum total loss absorbency requirements for globally systemic firms. 

Third, we need to take additional actions to promote regulatory cooperation 

among home and host supervisors in the event of the failure of an internationally 

active, systemic financial firm. Importantly, OLA only can apply to U.S.-chartered 

entities. Foreign subsidiaries and bank branches of a U.S.-based systemic financial 

firm could be ring-fenced or wound down separately under the insolvency laws of 

their host countries if foreign authorities did not have full confidence that local interests would be protected. Further progress on cross-border resolution ultimately 

will require significant bilateral and multilateral agreements among U.S. regulators 

and the key foreign central banks and supervisors for the largest global financial 

firms. It also may require that home-country authorities provide credible assurances 

to host-country supervisors to prevent disruptive forms of ring-fencing of the hostcountry operations of a failed firm. The ultimate strength of these agreements will 

depend on whether they have adequately addressed the shared objectives, as well 

as the self-interests, of the respective home and host authorities. The groundwork 

for these agreements is being laid, but many of the most critical issues can be addressed only after other jurisdictions have effective resolution frameworks in place. 

Fourth, we must help ensure that a home-country resolution of a global systemic 

financial firm does not cause key creditors and counterparties of the firm’s foreign 

operations to run unnecessarily. One of the key challenges to the orderly resolution 

of an internationally active, U.S.-based financial firm is that certain OLA stabilization mechanisms authorized under title II of the Dodd-Frank Act, including the 1- 

day stay provision with respect to over-the-counter derivatives and certain other financial contracts, may not apply outside the United States. Accordingly, counterparties to financial contracts with the foreign subsidiaries and branches of a U.S. firm 

may have contractual rights and substantial economic incentives to terminate their 

transactions as soon as the U.S. parent enters into resolution. Regulators and the 

industry are focused on the potential for addressing this concern through modifications to contractual cross-default and netting practices and through other means. 

The Federal Reserve will continue to support these efforts. 

Conclusion 

The financial regulatory architecture is stronger today than it was in the years 

leading up to the crisis, but considerable work remains to complete implementation 

of the Dodd-Frank Act and the post-crisis global financial reform program. A key 

prong of that program is making sure that Government authorities in the United 

States and around the world can effect an orderly resolution of a systemically important, internationally active financial firm. Much has been accomplished in this 

area, but much remains to be done. In the coming years, the Federal Reserve will 

be working with other U.S. financial regulatory agencies, and with foreign central 

banks and regulators, to make an orderly resolution of a global systemic financial 

firm as feasible as possible. 

Thank you for your attention. I am happy to answer any questions you might 

have. 

31 

PREPARED STATEMENT OF WILLIAM C. MURDEN 

DIRECTOR, OFFICE OF INTERNATIONAL BANKING AND SECURITIES MARKETS, 

DEPARTMENT OF THE TREASURY

MAY 15, 2013 

Chairman Warner, Ranking Member Kirk, Members of the Senate Subcommittee 

on National Security and International Trade and Finance, thank you for this opportunity to testify on the subject of cross-border resolutions. This is a complex, but 

critically important part of the international efforts to promote regulatory reform, 

and it is a privilege and honor for me to testify at this hearing. 

I. G20 and FSB Framework 

The financial crisis of 2007–09 and the subsequent European sovereign crisis revealed fundamental weaknesses in some global financial institutions. In the aftermath of a number of noteworthy financial firm failures, ranging from Lehman 

Brothers in the United States to Northern Rock in the U.K. to Dexia in continental 

Europe, the G20 Leaders agreed at their meeting in Pittsburgh in 2009 to develop 

frameworks and tools for the effective resolution of financial groups to help mitigate 

the disruption from financial institution failures and reduce moral hazard in the future. 

The G20 Leaders turned to the Financial Stability Board (FSB) to oversee the implementation of their financial regulatory commitments. The FSB is a unique international regulatory policy body that comprises high-level policy makers from finance 

ministries, central banks, banking supervisors, and market regulators of all the G20 

countries and other key financial centers, plus key international bodies, such as the 

IMF, World Bank, and the Bank for International Settlements (BIS). 

In October 2010, the FSB recommended a policy framework, which the G20 Leaders subsequently endorsed, to address the moral hazard posed by global systemically 

important financial institutions (G–SIFIs) that consisted of four key prongs: 

• a resolution framework to ensure that all financial institutions can be resolved 

safely, quickly and without destabilizing the financial system and exposing the 

taxpayer to the risk of loss; 

• a requirement that G–SIFIs have higher loss absorbency capacity to reflect the 

greater risks that these institutions pose to the global financial system; 

• more intensive supervisory oversight for financial institutions that may pose 

systemic risk; and, 

• robust core financial market infrastructures to reduce contagion risk from the 

failure of individual institutions. 

Today, I will discuss the first prong—the international resolution framework. 

II. The Overarching FSB Framework for Improving the Resolution of Financial Institutions 

All countries need to have effective national resolution systems to resolve failing 

financial institutions in an orderly manner, including a legislative and regulatory 

framework, legal powers, and institutional arrangements. An effective national resolution system is a necessary prerequisite to an effective cross-border resolution 

framework. At the same time, national resolution systems must be consistent with 

one another to facilitate the orderly cross-border resolution of G–SIFIs. Subjecting 

the same firm to conflicting legal rules, procedures, and mechanisms can create uncertainty, instability, possible systemic contagion, and higher costs of resolution. 

Accordingly, following the call by the G20 Leaders, the FSB laid out an approach 

to resolution that consisted of the following key elements: 

• a new international standard that countries would implement to ensure a consistent national resolution framework for G–SIFIs and other financial institutions; 

• making the new international standard, and resolution more generally, a top 

international priority to ensure that countries would devote the necessary resources to legislative, regulatory, and institutional changes to implement the 

new international standard; 

• an international assessment process to ensure that countries would comply with 

the new international standard and implement it in a consistent manner across 

jurisdictions; and 

• a framework to resolve individual G–SIFIs. 

32 

The FSB’s G–SIFI-specific framework, in turn, called for an individual crisis management group (CMG) for each of the G–SIFIs. The FSB has currently identified 28 

G–SIFI banks. Each of the 28 corresponding CMGs would have supervisors and resolution authorities from the bank’s home jurisdiction, as well as from 3–5 other key 

jurisdictions where the institution in question has a major presence. These CMGs 

would be tasked with developing recovery and resolution plans for individual firms 

and developing cooperation agreements among the relevant regulators to provide an 

ex ante agreement on how resolutions would be handled. Once planning is complete 

and cooperation agreements are in place, the CMGs would use a ‘‘resolvability assessment’’ process to determine what other steps are needed to make cross-border 

resolutions possible. 

The above description comprises the G20/FSB’s general resolution framework. The 

FSB established a Resolution Steering Group, chaired by Bank of England Deputy 

Governor Paul Tucker and with active U.S. participation, to oversee the development of this framework and its implementation. 

III. Progress in Completing the New G20/FSB Framework/Strategy 

Much progress has been made, reflecting the high priority and considerable time 

and energy that countries are devoting to the new framework. The FSB’s Resolution 

Steering Group developed a new international resolution standard, called the ‘‘Key 

Attributes of Effective Resolution Regimes for Financial Institutions’’. The ‘‘Key Attributes’’ offer over 100 specific recommendations in 12 general areas, including resolution authorities and powers, recovery and resolution planning, funding, safeguards, segregation of client assets, cross-border cooperation, and information sharing. In July 2011, the Resolution Steering Group issued the Key Attributes for public comment and, in November 2011, the G20 Leaders endorsed the new standard. 

The FSB’s Resolution Steering Group is now developing an assessment methodology that independent assessors can use as a yardstick to measure jurisdictions’ 

progress in implementing the ‘‘Key Attributes’’. In cooperation with the FSB, the 

IMF and the World Bank have launched a pilot project to test the methodology in 

two jurisdictions. Lessons learned in these pilot assessments will feed into the final 

methodology. Once this process is complete, we expect that the FSB will add the 

‘‘Key Attributes’’ to its list of 12 key international standards and codes. The key 

standards and codes represent minimum requirements for good practice in areas 

such as banking supervision, securities regulation, accounting, and antimoney laundering that countries are encouraged to meet or exceed. The FSB has identified 

these standards as meriting priority implementation by all countries. This, in turn, 

would mean that the IMF and the World Bank could add the Key Attributes to their 

regular analysis of a country’s financial sector through their Financial Sector Assessment Program, which they apply to 190 or so countries worldwide. 

The FSB itself has recently completed the first of many peer reviews to measure 

progress across its 24 member jurisdictions in implementing the ‘‘Key Attributes’’. 

FDIC Chairman Martin Gruenberg chaired the FSB’s review, which found that the 

United States is leading the globe in implementing its own effective resolution regime that was created under Title II of the Dodd-Frank Act. The FSB peer review 

also found that outside the United States, implementation of the ‘‘Key Attributes’’ 

remains at an early stage, and many jurisdictions still lack the necessary powers 

and institutions to resolve effectively either G–SIFIs or other financial institutions. 

Still, while other jurisdictions lag behind the United States, progress is occurring. 

In Europe, major jurisdictions, including France, Germany, the Netherlands, Switzerland, and the U.K., have proposed or passed legislation for resolution frameworks 

that are largely consistent with the ‘‘Key Attributes’’. The European Commission is 

working to finalize its own Bank Recovery and Resolution Directive in June of this 

year, which all 27 member States in the European Union would be expected to implement. The European Union is also working on a larger European effort to develop 

a true banking union, with a single supervisory mechanism and a single resolution 

authority for the euro area. 

In Asia, jurisdictions including Japan, Singapore, and Hong Kong have proposed, 

or are preparing to propose, resolution reforms, while other jurisdictions are still 

considering their approach. 

In addition to developing the ‘‘Key Attributes’’, the FSB’s Resolution Steering 

Group is continuing to work on specific aspects of cross-border resolution, including 

the treatment of client assets, the scope and prerequisites for information sharing 

between different authorities, and the resolution of derivatives central counterparties. The latter is expected to become vital linchpins of the financial system as derivatives reforms begin to take effect in major jurisdictions. 

The FSB and national authorities have also made important progress in enabling 

the resolution of individual firms. Most FSB member countries that are home to G– 

33 

SIFIs have developed high-level national resolution strategies and discussed these 

with key host authorities in their CMGs. To date, CMGs have been established for 

each of the 28 G–SIFIs, and nearly all CMGs have already met at least once. Each 

CMG is working to develop recovery and resolution plans for its respective institution and to negotiate cooperation agreements, or ‘‘COAGs,’’ among all of its member 

authorities. Resolvability assessments are scheduled for 2014 to determine what we 

have achieved so far and what remains to be done to make each G–SIFI resolvable. 

IV. Next Steps 

While much has been accomplished, there is much more still to do. The United 

States has 75 years of experience in resolving financial institutions, but many countries have only recently realized the need to implement an effective resolution regime. They must develop and operationalize the principles contained in the ‘‘Key Attributes’’ if the resolution of G–SIFIs with cross-border operations is to be made 

credible. Our focus is currently on three interrelated efforts: first, finalizing cooperation agreements and building trust between national regulators, so that we can successfully cooperate to resolve large international institutions across borders with 

minimum disruption to the global financial system; second, encouraging foreign jurisdictions to build more flexibility into their resolution frameworks to allow coordinated resolutions to become feasible; and third, establishing strong lines of communication and information-sharing among relevant national authorities. 

In addition, the FSB Resolution Steering Group continues to work in the following 

areas: 

• completing the resolution planning process and finalizing cooperation agreements for each G–SIFI; 

• developing supplemental guidance containing clear principles to address: (i) information sharing for resolution purposes; (ii) the protection of client assets in 

resolution; (iii) the resolution of financial market infrastructures (FMIs); and, 

(iv) the resolution of insurers; 

• finalizing the ‘‘Key Attributes’’ Methodology (public consultation, pilot assessments); 

• following up on the recommendations of the peer review on resolution regimes; 

and, 

• planning for a resolvability assessment process for G–SIFIs that should be 

launched in early 2014. 

The experience with the recent bank failures in Cyprus, including an initial proposal to haircut insured depositors, has refocused attention within Europe on the 

importance of an effective resolution framework. Cyprus had no resolution statute 

and its parliament was required to draft and approve legislation in only a few days, 

which in the event did not impair insured depositors. However, this has reinforced 

the need in Europe to make progress on implementing resolution systems, including 

a depositor preference regime. It is important that the FSB build on the ‘‘Key Attributes’’ and include specific depositor preference and creditor hierarchy. 

V. Conclusion 

Keeping our focus on these efforts is vital. The financial crisis made clear that 

the failure of large, international financial firms can result in systemic damage that 

does not stop at national borders and can directly impact the day-to-day lives of people around the world. This risk and the complexity of today’s global financial system 

make international cooperation and understanding among national regulators absolutely necessary. The FSB is playing a vital role in bringing domestic and foreign 

regulators together to build the capacity, the mutual trust, and the communication 

networks necessary to make possible the resolution of systemic financial institutions 

without the risk of systemic damage, a risk we now know is all too real. 

34 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM JAMES R. WIGAND 

Q.1. Dodd-Frank did not specifically enact any new anti-money 

laundering laws. However, in what ways has the Act impacted existing Federal oversight of AML and BSA compliance in each of 

your agencies? 

A.1. As you note in your question, the Dodd-Frank Act did not 

enact any new anti-money laundering (AML) laws. For the FDIC, 

the biggest impact on our oversight of AML and Bank Secrecy Act 

(BSA) compliance in recent years were the significant changes incorporated into the BSA with the passage of the USA Patriot Act 

in October 2001. In particular, §327 of the USA Patriot Act addresses the effectiveness of insured depository institutions in combatting money laundering activities specifically when an institution 

proposes a merger. For practical purposes, the statute requires the 

agency to consider the existence of any supervisory action that includes BSA/AML provisions when processing a merger application. 

Generally, the statute requires that a merger cannot be approved 

with any of the following outstanding issues: 

1. Unresolved BSA/AML program violations or provisions in enforcement actions; such violations would result from failures of any 

component in the BSA/AML Program requirements, which include: 

a. System of internal controls; 

b. Independent review of the BSA/AML Compliance Program; 

c. BSA Officer responsible for daily BSA/AML activities; 

d. BSA/AML training; and 

e. Customer Identification Program. 

2. Pending AML investigations or supervisory actions; or 

3. Outstanding AML investigations, actions, or pending matters 

with other relevant agencies (such as Treasury, FinCEN, or law enforcement). 

With respect to large, complex institutions, such as those raising 

concerns regarding cross-border resolutions, the FDIC’s direct supervisory role includes the processing of applications seeking to 

merge the uninsured entity into an insured institution (for example, merging a mortgage subsidiary into an insured bank). We have 

noted a nominal increase in the number of such merger proposals, 

which are governed by Section 18 of the FDI Act and which generally seek to rationalize or consolidate corporate structures. In 

each case, the FDIC must consider each applicable statutory factor, 

including the effectiveness of the insured institutions involved in 

the merger in combatting money laundering activities. 

Separately, we note that large, complex insured institutions generally have a full range of cross-border activities and relationships. 

In terms of off-site analysis and the review of various applications, 

we evaluate the primary Federal regulator’s assessment of the 

bank’s compliance with all aspects of the law and regulations, including the BSA. 

Sections 313 and 319 of the USA Patriot Act amended the BSA 

to prohibit U.S. financial institutions from maintaining accounts in 

the U.S. for foreign shell banks and require record keeping for cerVerDate Nov 24 2008 08:46 Sep 26, 2013 Jkt 048080 PO 00000 Frm 00038 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\05-15 IMPROVING CROSS BORDER RESOLUTION TO BETTER PRO
35 

tain foreign correspondent accounts. To comply with this regulation, financial institutions need to conduct enhanced due diligence 

to ensure it knows the owners of the account relationship and the 

activity in the account corresponds to the U.S. bank’s expectations 

for that relationship. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM MICHAEL S. GIBSON 

Q.1. During the Banking Committee’s March hearing on money 

laundering, Governor Powell noted that the Federal Reserve played 

a key role in developing standards that improved transparency in 

cross-border payment messages, including the standards adopted 

by Basel and SWIFT. These standards required the expanded disclosure of the originator and beneficiary on payment instructions 

sent as part of cover payments. Manipulation of this information 

not only facilitates money laundering, but also sanctions evasion, 

as we have seen in numerous cases. 

Isn’t it true though that, even after about 20 years have gone by, 

this information is still not actually required to be collected under 

the Bank Secrecy Act or its ‘‘record keeping and travel’’ rules 

issued jointly by the Fed and FinCEN? 

As stated at that hearing, both the Treasury and the Federal Reserve participate in an AML task force at the principals level. Has 

this BSA issue been addressed there, yet? 

Even if banks may be hesitant, on their own volition, to accept 

such payment messages without all the fields completed, would 

such a gap in the law make it difficult to prosecute a violator who 

abuses the payment instruction? What effect has this on compliance with a Deferred Prosecution Agreement? 

A.1. The record keeping and travel rules issued by the Board and 

FinCEN in 1995 require U.S. financial institutions, at the initiation of a funds transfer, to collect and retain the name of the 

originator (and, if received with an incoming funds transfer order, 

the name of the recipient) on funds transfers in excess of $3,000. 

From a compliance standpoint, U.S. financial institutions routinely 

screen the payment messages that accompany these funds transfers for compliance with U.S. economic sanctions. Foreign banks 

that operate in countries without rules similar to those imposed by 

the U.S. have not always had in place the mechanisms to ensure 

transactions routed through the U.S. comply with U.S. law. 

The Board has a history of taking action against the institutions 

we supervise as needed to address unsafe or unsound banking 

practices in this area, including against those who omit, delete or 

alter information in payment messages or orders for the purpose of 

avoiding detection of that information by any other financial institution in the payment process. However, the Board does not have 

the legal authority to impose criminal penalties against financial 

institutions for violations of U.S. economic sanctions, and does not 

use Deferred Prosecution Agreements (DPAs). The Department of 

Justice and other criminal law enforcement authorities have used 

DPAs as an enforcement tool against banking entities and others 

that violate the law, and have primary responsibility for monitoring and assessing compliance under such agreements. 

36 

Currently, as a member of the U.S. Department of the Treasury’s 

Interagency Task Force on Strengthening and Clarifying BSNAML 

Framework (Task Force), the Board is engaged in a review of the 

BSA, its implementation, and its enforcement with respect to U.S. 

financial institutions that are subject to these requirements. Task 

Force discussions are at an early stage and findings and recommendations are still being worked on. 

As you point out, the Dodd-Frank Act did not enact any new 

anti-money laundering requirements. The Act has not had a significant effect on the Federal Reserve’s supervisory program related to 

BSNAML compliance. 

Q.2. Dodd-Frank did not specifically enact any new anti-money 

laundering laws. However, in what ways has the Act impacted existing Federal oversight of AML and BSA compliance in each of 

your agencies? 

A.2. Please see response to Question 1.