69

The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

December 11, 2013 - 8:47 A.M.

The meeting of the FDIC Systemic Resolution Advisory

Committee ("Committee") was called to order by Martin J.

Gruenberg, Chairman of the Board of Directors, Federal Deposit

Insurance Corporation ("Corporation" or "FDIC").

The members of the Committee present at the meeting were:

Anat R. Admati, George G.C. Parker Professor of Finance and

Economics, Graduate School of Business, Stanford University,

Stanford, California; Michael C. Bodson, President and Chief

Executive Officer, The Depository Trust and Clearing Corporation

(DTCC), New York, New York; Michael Bradfield, Mercersburg,

Pennsylvania; H. Rodgin Cohen, Senior Chairman, Sullivan &

Cromwell LLP, New York, New York; William H. Donaldson,

Chairman, Donaldson Enterprises, New York, New York; Peter R.

Fisher, Senior Managing Director, BlackRock Investment

Institute, New York, New York; Janine M. Guillot, Former Chief

Operating Investment Officer, CalPERS, Sacramento, California;

Richard J. Herring, Jacob Safra Professor of International

Banking and Professor of Finance, The Wharton School, University

of Pennsylvania, Philadelphia, Pennsylvania; Thomas H. Jackson,

Distinguished University Professor and President Emeritus, Simon

Business School, University of Rochester, Rochester, New York;

Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship,

MIT Sloan School of Management, Cambridge, Massachusetts; Donald

L. Kohn, Senior Fellow, Economic Studies Program, Brookings

Institution, Washington, D.C.; John A. Koskinen, Non-Executive

Chairman of the Board of Freddie Mac, Washington, D.C.; Douglas

L. Peterson, President, Standard and Poor's, New York, New York;

John S. Reed, Chairman, Corporation of MIT, New York, New York;

December 11, 2013
70

Gary H. Stern, Director, The Depository Trust and Clearing

Corporation (DTCC), The Dolan Company, and the National Council

on Economic Education, New York, New York; Paul A. Volcker,

Chairman, Trustees of the Group of 30, New York, New York; and

David J. Wright, Secretary-General, International Organization

of Securities Commissions.

Member Charles A. Bowsher, Chairman and Member of the

Research Advisory Council of Glass, Lewis & Company, LLC,

Bethesda, Maryland, was absent from the meeting.

Members of the Corporation's Board of Directors present at

the meeting were: Martin J. Gruenberg, Chairman; Thomas M.

Hoenig, Vice Chairman; Jeremiah o. Norton, Director(Appointive);

and Thomas J. Curry, Director (Comptroller of the Currency).

Corporation staff who attended the meeting included: Steven

O. App, Annmarie H. Boyd, Steven E. Byrd, John P. Conneely,

Kymberly K. Copa, Carolyn D. Curran, Christine M. Davis,

Arnie Dorman, Bret D. Edwards, Diane Ellis, Robert E. Feldman,

Ralph E. Frable, Fred W. Gibson, Marianne Hatheway, Herbert J.

Held, Martin D. Henning, James J. Hone, Craig R. Jarvill, Kathy

KaIser, Rose M. Kushmeider, Alan W. Levy, Roberta K. McInerney,

Thomas A. Murray, Arthur J. Murton, Richard Osterman, Bimal V.

Patel, Barbara A. Ryan, R. Penfield Starke, Marc Steckel,

Maureen E. Sweeney, F. Angus Tarpley III, David Wall, Cottrell

L. Webster and John D. Weier.

William A. Rowe, III, Deputy to the Chief of Staff and

Liaison to the FDIC, Office of the Comptroller of the Currency,

was also present at the meeting.

Chairman Gruenberg opened and presided at the meeting. He

began by welcoming the Committee members and noting that the

meeting provides a timely follow up to the final adoption

yesterday by the FDIC's Board of Directors of the "Volcker Rule"

and the issuance for publication in the Federal Register of the

FDIC's single point of entry ("SPOE") strategy. He also

welcomed Thomas H. Jackson, from the University of Rochester,

Rochester, New York, as a new member of the Committee.

Chairman Gruenberg then provided an overview of the meeting

agenda, noting that it would focus on the FDIC's progress over

the past year in three key areas: (1) cross-border cooperation;

(2) the resolution plans that companies must submit under Title

I of the Dodd-Frank Wall Street Reform and Consumer Protection

Act (Dodd-Frank Act") ("Title I"); and (3) the FDIC's Title II

December 11, 2013
71

SPOE resolution strategy. With respect to cross-border

cooperation, he advised that the joint paper released last year

by the FDIC and the Bank of England on a common approach to

systemic resolution has proven to be a very constructive

development by highlighting the cooperation between our

respective jurisdictions and framing some of the issues relating

to the resolution of systemic companies. He noted that, at the

outset of the crisis in 2008, the issue of resolving global

systemically important financial institutions (MSIFls") was not

on the international agenda or receiving serious consideration

by any national jurisdiction; that the environment has

transformed and this area is now a major issue with every major

national jurisdiction, particularly the home countries of global

SIFls; and that this issue has been the subject of national

legislation and, in Europe, it has additionally been the subject

of regional activity by the European Union (MEU"). He also

noted that, in addition to its work with the United Kingdom

(MUK"), the FDIC has engaged other key national jurisdictions,

including Switzerland, Germany, Japan and the European

Commission (MEC"), to develop close working relationships; that

there has been an eagerness to engage with the FDIC both in

recognition of the importance of the issue for their home

jurisdictions and the value that the FDIC's experience brings to

such engagements; that the FDIC anticipates cross-border

~abletop exercises with the UK and other jurisdictions; and that

a joint working group has been established between the FDIC and

the EC on both resolutions and deposit insurance.

Chairman Gruenberg next discussed the Title I resolution

plans, advising that the first round of resolution plans were

submitted last year by the 11 largest companies; that the FDIC

and the Board of Governors of the Federal Reserve System

(MFederal Reserve") issued guidance in April 2013 laying out

five benchmarks for resolution under bankruptcy or Title II of

the Dodd-Frank Act (MTit1e II") to be addressed in the second

round of resolution plans to be submitted by these companies:

funding and liquidity, counterparty actions, critical

operations, cross-border cooperation, and multiple competing

insolvencies; and that the FDIC and the Federal Reserve are

currently reviewing the second round of plans submitted by these

companies in October 2013, which are subject to evaluation under

the statutory standard of resolvability under bankruptcy.

Finally, Chairman Gruenberg discussed the Title II SPOE

resolution strategy, advising that the FDIC has released for

publication in the Federal Register a detailed description of

how it envisions Title II would work and requested public

December 11, 2013
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comment on the SPOE strategy and a set of key issues identified

for consideration. He also advised that the FDIC has been

working closely with the Federal Reserve on a proposed rule

relating to a minimum holding company debt requirement to

facilitate the implementation of the SPOE strategy. Mr. Volcker

noted that his impression is that we are three quarters of the

way there with the SPOE strategy which he mentioned was a

remarkable accomplishment. Chairman Gruenberg then introduced

Arthur J. Murton, Director of the Office of Complex Financial

Institutions ("OCFI"), noting that he previously had been

Director of the Division of Insurance and Research; that he had

a key advisory role during the recent crisis, including the

development of the debt guarantee program implemented during the

crisis to guarantee the unsecured debt of U.S. banks; and that

he also was deeply involved in structuring the Resolution Trust

Corporation's asset disposition process during the 1990s.

Mr. Murton advised that the first panel would provide an

update on the Title I resolution planning work and efforts to

determine how bankruptcy could be more effective in the

resolution of a SIFI. He then introduced the panel members:

Herbert J. Held, Associate Director, OCFI; David N. Wall,

Assistant General Counsel, Complex Financial Institutions

Section, Legal Division; and Barry E. Adler, Bernard Petrie

Professor of Law and Business, and Associate Dean for

Information Systems and Technology, New York University School

of Law.

Mr. Held began the presentation by noting that, under the

Dodd-Frank Act, bankruptcy is the first option in the event of a

failure of a SIFI; that, under Title I, companies are required

to submit resolution plans-the so-called "living wills"-that

describe their plans for a rapid and orderly resolution under

the bankruptcy code or other relevant insolvency schemes in the

event of material financial distress or failure; and that the

Federal Reserve and the FDIC must review the resolution plans

and may find that a plan would not facilitate an orderly

resolution in bankruptcy. He advised that these companies are

complex firms with thousands of legal entities that operate

along business lines rather than by legal entities. He also

advised that some of the key objectives of the initial

resolution plans were to identify the critical operations of the

firms, describe the firms' strategies to maintain those

operations in a crisis situation, and map the critical

operations and core business lines to the firms' material legal

December 11, 2013
73

entities. In addition, he continued, the resolution plans were

required to identify and improve the firms' understanding of the

resolution regimes for their material entities, both domestic

and foreign, and identify the key obstacles to a rapid and

orderly resolution. He noted that the first wave of resolution

plans was filed in July 2012 by the largest firms, the second

wave was filed in July 2013, and the third wave of filers-which

would be the largest number of companies and include the

remainder of the U.S. banks over $50 billion and large

international banks with U.S. operations-would be submitting

their plans in December 2013. He advised that additional

guidance was provided jointly with the Federal Reserve to the

first wave of filers after review of their initial resolution

plans; that the FDIC and the Federal Reserve identified a set of

obstacles to be addressed by the firms' 2013 plans, including

multiple competing insolvencies, global cooperation, operations

and interconnectedness, counterparty actions, and funding and

liquidity; and that, while the 2012 plans were based on the

failure of all material entities, the firms' 2013 plans may be

based on a resolution strategy involving only the bankruptcy of

a parent U.S. holding company-using a SPOE strategy-or the

failure of material entities where the firm is

compartmentalized. He concluded by noting that the FDIC,

jointly with the Federal Reserve, was currently reviewing the

2013 resolution plans submitted by the first wave of filers in

October 2013; and that three nonbank financial firms designated

as systemic entities by the Financial Stability Oversight

Council ("FSOC") would be required to file their resolution

plans by July 2014.

During the discussion that followed, Committee members

raised a number of issues relating to the Title I resolution

plans. Mr. Herring commented that the public section of the

resolution plans lacks standardized terminology and provides

only minimal information on a firm's structure and its

subsidiaries; and that a more rigorous approach should be used

in determining what constitutes proprietary information that

remains confidential. Noting that one issue identified in the

first group of resolution plans was the complexities of these

organizations and the lack of alignment between the legal

entities and the operations, Mr. Kohn asked if the next round of

plans in this process would address ways to make these

institutions more amenable to resolution by requiring them to

simplify their structure. In response, Mr. Held advised that,

over the past two years, the firms have taken steps to simplify

their structures; that the number of entities within their

structures has declined fairly dramatically for some

December 11, 2013
systems;

credit

In

74

organizations; and that this area presents a major obstacle that

they must address and prove they can overcome. Mr. Herring

suggested that disclosing information on efforts to simplify the

structure of these organizations would give the public more

confidence in the procedure by providing a more systematic way

of understanding the progress that is being made. Noting that

proprietary information presents an issue, Chairman Gruenberg

indicated that there would be real value provided by focusing on

consistency in the information disclosed in the public section

of the resolution plans and identifying particular information

that could be made available to the public.

Mr. Jackson noted that there seems to be a disconnect

between Title I and Title II with respect to the resolution

plans; that the Title I plans are focused on bankruptcy even

though it may be difficult to resolve many of these firms under

the current bankruptcy regime; and that it may be useful to have

more information provided in the Title I plans to address how

the firms could be resolved under the Title II SPOE strategy.

Mr. Held responded by emphasizing that the Title I resolution

plans are an integral part of the FDIC's Title II planning; and

that the information reviewed in the resolution plans for

compliance with Title I is vital to the Title II planning. Mr.

Stern asked whether the FDIC has noticed a significant

difference in the quality and credibility of the second round of

resolution plans that have been submitted, and whether the

boards of directors of the organizations have been involved in

the resolution plan process. Mr. Held responded by noting that

the first round of plans were self-examinations by the firms

that focused on their structure and interconnections, and the

identification of resolution obstacles; that the second round of

plans are focused on how they would overcome the resolution

obstacles that have been identified; and that it appears that

the firms' boards of directors and senior management have been

involved in developing the resolution plans. Mr. Cohen advised

that, at least with respect to the resolution plans in which he

was involved, the boards of directors were deeply involved in

providing substantial comment on the plans before they were

submitted; and that these plans take into account the problems

encountered at Lehman Brothers and AIG and have focused on

liquidity and counterparty exposure as critical elements of the

plans. From the standpoint of a credit rating agency, Mr.

Peterson emphasized the importance of cross-firm analysis and

better disclosures, particularly more transparency on

derivatives and derivative valuations as early warning

he also stressed the importance of more consistency on

portfolios, such as how credit is priced and accrued.

December 11, 2013
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response, Mr. Murton indicated that the FDIC's supervisory staff

has been actively involved in reviewing these firms from a

resolution perspective and performing horizontal reviews for

consistency across the firms, which has been helpful in the

resolution planning process.

Mr. Murton then turned the panel discussion over to Mr.

Adler for a presentation on the resolution of a SIFI under

bankruptcy law. Mr. Adler began by noting that there are a

number of potential obstacles to an effective bankruptcy of a

SIFI: the ineligibility of corporate affiliates for bankruptcy;

the process under the current bankruptcy code may start too

late; a liquidity crisis may hobble any resolution attempts if

there is a worldwide liquidity crisis and funds are unavailable;

regulator voice may be required if these firms have effects on

the worldwide economy and there is financial distress; the need

to limit contagion, which the bankruptcy code currently is not

designed to address; a resolution may be required faster than

the customary timeframe; and the need for global coordination.

He briefly discussed some of these potential obstacles,

explaining how they would be handled under current bankruptcy

law and outlining improvements that could be made to the

bankruptcy code. With respect to the first obstacle involving

the ineligibility of corporate affiliates, he noted that some of

a covered financial institution's subsidiaries or other

affiliates, such as banks and insurance companies, are

ineligible for bankruptcy under the current law; that, to avoid

inconsistent results and disruption during bankruptcy,

insolvency processes of a corporate group should be

administratively-but not substantively-consolidated; and that

the current FDIC treatment of insured depository institutions

could be included in consolidated administration since that

process works very well. He emphasized that administrative

consolidation of a corporate group would require amendment of

the current bankruptcy laws similar to the proposal for the

addition of a Chapter 14 to the bankruptcy code. He continued,

noting that another potential obstacle is that the process may

start too late based on the tendency of equity-controlled

enterprises to wait too long in seeking resolution of financial

distress; and that the prospect of a "hard landingH

for equity

and managers has exacerbated this tendency. He advised that

bankruptcy laws should be amended to permit involuntary petition

by a SIFI's primary regulator without being limited by a SIFI's

failure to pay its debts as provided under current law; and that

the trigger for an involuntary petition by a regulator could be

balance sheet insolvency or insufficient capitalization, and

December 11, 2013
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include a determination that there is, or will be, systemic

financial crisis.

Regarding a liquidity crisis as an obstacle to the

resolution of a SIFI, Mr. Adler explained that it is impossible

to run a bankruptcy process without new financing, but that

private sources of debtor-in-possession financing may be

unavailable in the middle of a systemic financial crisis. He

suggested that the government could serve as the debtor-inpossession lender and, through the SIFI's primary regulator,

exercise control over the SIFI and the bankruptcy process. Mr.

Johnson commented that proposing the government provide funding

administered by a bankruptcy judge is unlikely to be politically

viable and appears to be a Title II resolution that skips over

the bankruptcy process. In response, Mr. Adler explained that

these proposals would not be a wholesale replacement of the

bankruptcy code for the specific rules in Title II but instead

these proposals reflect the current bankruptcy law, including

the priority rule, with some additional amendments; that the

dominance of the debtor-in-possession lender is often cited as a

problem with the current bankruptcy process because the secured

lenders who take control do not always have the interest of the

firm as a whole in mind; and that having the primary regulator

in control as the debtor-in-possession lender may be beneficial

in the resolution of a SIFI because the regulator can take into

account concerns such as contagion and payment of systemically

important debts. Mr. Bradfield commented that the approach

being proposed would not avoid all of the complications of

bankruptcy, particularly if it minimizes the rights of other

creditors. Mr. Adler responded by noting that cases can be

conducted very quickly through the current bankruptcy process

with prepackaged bankruptcies in which the major creditors'

disputes have been resolved in advance to quiet dissent; that

the same type of process could be applied through the bankruptcy

process if there is an effective resolution plan; that

bankruptcy judges can conduct expedited proceedings that

replicate the speed provided in Title II; and that there is an

advantage to using the current bankruptcy process and a long

established set of insolvency rules rather than new and untested

procedures, such as those of Title II. Mr. Cohen commented that

there seems to be a widespread assumption that Title II is an

anomaly and an approach that is radically different than

anything that existed before; that the opposite conclusion is

correct and Title II is simply a recognition that financial

institutions are resolved differently than other corporations;

and that the proposed approach suggests that there should be a

special arrangement at the holding company level recognizing

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modern corporate structure, not as a substitute for Title II but

as a logical complement.

Mr. Adler briefly discussed other measures for an effective

bankruptcy process, noting that the capitalization structure is

a key feature of the resolution plans; and that, if there is

sufficient loss-absorbing debt in place to allow for a bail-in,

the bankruptcy code in its current form could solve the problem

of restructuring relatively easily, provided there is an

administrative process in place in which the business lines and

entities can be reconciled and the viable assets sold to a

bridge company. He also noted that transparency of obligations

and counterparties by requiring the use of clearinghouses would

be essential to the current bankruptcy process working properly;

and that the current bankruptcy code would be more effective

with a temporary stay, including with respect to financial

contracts, to permit the transfer of assets to a bridge

institution.

After thanking Mr. Adler for his presentation, Chairman

Gruenberg announced that the meeting would briefly recess.

Accordingly, at 10:18 a.m., the meeting stood in recess.

* * * * * * *

The meeting reconvened at 10:40 a.m. the same day, at which

time Mr. Murton introduced R. Penfield Starke, Assistant General

Counsel, Litigation and Resolutions Branch, Legal Division, to

join Mr. Held to provide an update on Title II and the FDIC's

SPOE strategy document, which has been issued for publication in

the Federal Register with a request for public comment.

Mr. Held began by noting that Title I and Title II provide

the authority to resolve a SIFI, with bankruptcy being the

preferred option; that Congress, in providing these authorities,

recognized that SIFIs may not be resolvable under bankruptcy

without posing a systemic risk to the u.s. economy; and that

Title II provides the backup authority to place a SIFI into a

receivership process if a resolution through bankruptcy would

have a serious adverse effect on u.s. financial stability. He

explained that resolution of a SIFI under Title II has the dual

objectives of promoting market discipline and maintaining the

stability of the u.s. financial system; that the orderly

liquidation authority of Title II provides the necessary tools

for the rapid and orderly resolution of a covered financial

company; and that Title II establishes certain policy goals for

the orderly liquidation authority: (1) owners and management

December 11, 2013
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responsible for a covered financial company's failure must be

held accountable, (2) the stability of the U.S. financial system

must be maintained, and (3) the resolution of the failed company

must impose losses in accordance with statutory priorities and

without imposing a cost on the U.S. taxpayers. He noted that

the review of the Title I resolution plans by the FDIC and the

Federal Reserve identified obstacles to the resolution of a SIFI

through the bankruptcy process or an orderly resolution under

Title II; and that one of the biggest challenges to resolution

is the organization of SIFls under a holding company structure

with hundreds or thousands of interconnected legal entities that

span many jurisdictions, both in the U.S. and internationally,

with core business lines rarely aligned with legal entities and

funding dispersed between affiliates as the need arises. He

advised that the FDIC developed the SPOE strategy to address

these obstacles; and that, under the SPOE strategy, the top-tier

parent holding company is placed into receivership and

shareholders, debt holders, and management are held accountable

for the failure; and that the SPOE strategy has the benefits of

keeping the operating subsidiaries open, protecting against

contagion of the financial system, and maintaining vital links

among the operating subsidiaries to ensure continuity of

services.

Next, Mr. Held discussed the resolution process, noting

that, after the FDIC's appointment as receiver for the failed

holding company, which would follow the "three keys" process, a

bridge financial company ("bridge company") would be created and

substantially all of the assets of the receivership estate would

be transferred to the bridge company, leaving most of the

liabilities in the receivership estate. He explained that the

board of directors and senior management of the failed holding

company would be replaced; that the FDIC would enter into an

initial operating agreement with the board of directors of the

bridge company, detailing their responsibilities and directing

them to: determine the cause of the failure and develop a plan

to remedy it, retain accountants and valuation consultants to

prepare financial statements to support a debt for equity swap,

develop a business plan for the bridge company, and develop

funding, liquidity, and capital plans with regulatory approval;

and that a plan for restructuring the company would be

established. He emphasized that corporate governance of the

bridge company is a key aspect of the SPOE strategy; that the

bridge company would be well-capitalized, enabling it to obtain

funding from customary sources in the private market; that, if

private sources of funding are not immediately available because

of market conditions, the Dodd-Frank Act provides for short-term

December 11, 2013
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funding from an Orderly Liquidation Fund, which would be

available on a fully secured basis and, if necessary, backed by

assessments against the largest financial companies; and that

taxpayer losses are prohibited under the Dodd-Frank Act.

Committee members voiced a number of concerns regarding the

SPOE strategy. Mr. Volcker expressed his concern that the SPOE

strategy has the appearance of temporarily assisting the failed

holding company and allowing it to continue as a surviving

institution that has shed some of its bad assets, without a

liquidation of the company. Sharing this concern, Mr. Fisher

stated that the appearance of the holding company ultimately

remaining whole, with the operating subsidiaries remaining

intact, could result in the loss of counterparty discipline on

the operating subsidiaries. In response, Mr. Cohen pointed out

that counterparties may not understand the level of their risk;

that the SPOE strategy is not unique and multiple points of

entry-including a receivership-could be used if the problems at

an operating subsidiary are too severe; and that, if the company

actually fails, counterparties have the risk of suddenly

becoming subordinated creditors. Responding to Mr. Volcker's

concern, Mr. Murton indicated that the SPOE strategy document

emphasizes that, if a company goes into a Title II receivership,

it would be subject to changes, simplification, and

restructuring and emerge from that process in a condition that

would allow it to be resolved under bankruptcy. Mr. Jackson

commented that the Dodd-Frank Act does not adequately

distinguish between appropriate loss-bearing capacity and the

idea of liquidation and that, at the heart of the issue, is

ensuring appropriate loss-bearing capacity; that the SPOE

strategy technically results in a new entity in a legal sense;

that the SPOE strategy uses a bail-in model of a single entity

recapitalization made into a two-entity recapitalization that

achieves the same substantive result; and that, before the

bridge company would be released back into the world, it would

have a business model that subsequently could be resolved under

Title I.

Mr. Held then discussed the priority of claims in the

resolution process, noting that shareholders' equity,

subordinated debt, and unsecured liabilities will remain with

the holding company receivership and bear the losses; that

certain unsecured creditors' claims may be transferred to the

bridge company, such as vendor-type claims; that transfers with

disparate impact would only be made to maximize value to the

creditors or continue essential operations of the bridge

company; and that the FDIC has limited its discretion to treat

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similarly situated creditors differently. He continued,

advising that termination of the bridge company would require

the FDIC's approval of an enforceable restructuring plan; and

that, as part of this process, there would have to be a

valuation of the bridge company for an exchange of creditor

claims for newly issued securities. He explained that there

would be a claims waterfall to take into account the order of

preference of creditors; and that, in the event the senior

secured creditors take a haircut in the initial valuation,

subordinated creditors would not receive anything until the

senior secured creditors were paid in full, with the

subordinated creditors then receiving a portion of any increase

in value. The Committee members discussed a number of issues

regarding the SPOE strategy, including the apparent disconnects

between the proposed resolution strategy involving a

restructuring of the company and the common perception of what

would constitute a liquidation of the company. Chairman

Gruenberg emphasized that the issues raised by the Committee

members illustrate the complexity of the challenges in

developing a resolution strategy that addresses a set of

competing public goals and outcomes that are not easily

reconcilable; and that the SPOE strategy document that the FDIC

has released for public comment describes how the FDIC envisions

utilizing its authorities to implement that resolution strategy

and identifies issues on which it requests comment to enhance

the FDIC's thinking on this strategy.

In conclusion, Mr. Held advised that fresh start accounting

would be used as the accounting framework for the termination of

the bridge company, which is similar to an exit from a Chapter

11 bankruptcy; that the bridge company would hire the

accountants and evaluation firms to do the accounting; that the

FDIC, in its receivership capacity, would review the valuation

with its financial advisors to structure a new debt stack; and

that the receiver would distribute the securities to the

creditors in the order of preference. He also described the

timeline that the FDIC envisions for the resolution under the

SPOE strategy.

Mr. Murton then announced that the meeting would recess for

lunch. Accordingly, the meeting stood in recess at 11:54 a.m.

* * * * * * *

The meeting reconvened at 1:16 p.m. that same day, at which

time Mr. Murton introduced Robert Young, Managing Director, and

David Fanger, Senior vice President, Financial Institutions

December 11, 2013
81

Group, Moody's Investor Service, to present the next panel

discussion on systemic support and U.S. bank ratings.

Mr. Young began by noting that the presentation would

provide a brief overview of Moody's bank rating methodology and

the systemic supports in both a global and U.S. context that are

incorporated in it, followed by a discussion of the framework

for analyzing the orderly liquidation authority and the SPOE

strategy that resulted in Moody's rating action in November

2013, which removed all of the ratings uplift from large bank

holding company senior debt.

Mr. ranger explained that Moody's approach to rating banks

is a building block approach that evaluates a bank's intrinsic

risk factors, such as risk positioning, risk management,

operating environment, the financial fundamentals, and franchise

value; and that, prior to determining the final risk of default,

Moody's also evaluates external factors, such as the likelihood

of support for a particular institution, regulatory regime,

legal framework within the country in which that bank is

principally domiciled or headquartered, and risk of government

intervention-particularly in the context of avoiding foreign

currency moratoria. Noting that Moody's methodology takes into

account government support, as well as potential support from a

strong parent company or other cooperative group, he briefly

discussed the support considerations that Moody's evaluated

through the recent crisis and the steps taken to reduce support

assumptions between the enactment of the Dodd-rrank Act in July

2010 and November 2013. He advised that Moody's analysis of the

credit risk of the orderly liquidation authority and the

feasibility of achieving the rOle's objectives of maximizing

value while minimizing contagion focused on four primary

hurdles: (1) international regulatory cooperation; (2) market

structure changes to reduce interconnections; (3) capital

structure changes; and (4) corporate structure changes to reduce

complexity. He emphasized that Moody's analysis is forwardlooking, assessing the probability of support and probability of

default and attempting to reflect that probability in a single

rating system and with a rating horizon that can extend for up

to 30 years.

Mr. Young advised that, although progress has been made

with respect to international regulatory cooperation and market

structure changes are being addressed to reduce the

interconnections that create contagion and risk to the broader

financial system, the current political environment makes it

likely that a SPOE receivership would be used; and that Moody's

December 11, 2013
82

believes it should not include government support in the large

bank holding company ratings. Mr. Fanger noted that this does

not mean that the U.S. government would not step in and provide

support in some circumstances, but that, if the U.S. government

provides support, holding company creditors would still suffer a

loss; and that the SPOE strategy would be used in combination

with other actions that could benefit the operating companies to

some extent, with no benefit to the holding company creditors.

Mr. Young concluded by noting that the greater probability of

default for holding company creditors is offset by an

expectation of lower loss severity from an anticipated increase

in the minimum debt requirements and a greater preservation of

franchise value under the orderly liquidation authority. He

explained that support would be maintained at the bank operating

company level, but that the source has changed from taxpayers or

bail-out of the firms to holding company creditors through a

bail-in of the debt or loss-absorbing capital at that level;

that some support would be maintained for subordinated debt at

the operating company level; and that systemically important

international operating subsidiaries that are key to the

functioning of the firm would benefit from support being

provided to or from the holding company to their domestic

affiliates.

In the brief discussion that followed, Committee members

commented on a number of issues relating to Moody's ratings

methodology. Mr. Peterson commented that S&P continues to

include government support in their ratings of the major banks.

Noting that Moody's removed support for the holding company,

Director Norton asked whether Moody's was suggesting that it

would expect some future government support, or whether its

baseline expectation is that it will be SPOE only, without

additional government measures. In response, Mr. Fanger

explained that the portion of support at the subsidiary level

translates into a 60 to 80 percent probability that creditors at

the operating subsidiary will benefit from some form of support

that allows them to avoid a default; that the support will be

the combination of the bail-in of holding company creditors,

which recapitalizes the holding company and allows the holding

company to then recapitalize subsidiaries as necessary; and that

the support is not incorporated into the holding company

ratings. Mr. Herring observed that the counterparty's view,

vis-a-vis the subsidiary, would change drastically when the bank

holding company goes through a SPOE because they would only have

the capital of the subsidiary; and that, although the

counterparty discipline will be weaker before the SPOE, it will

be stronger after the SPOE, and there will be more pressure on

December 11, 2013
83

the remaining operating subsidiary to recapitalize. Mr. Fanger

noted that, to the extent the resolution of the holding company

involves a further breakup of the firm, counterparties are also

going to be wary because they are not certain who the other

counterparties will be afterward; Mr. Young added that it is

anticipated that the Federal Reserve's minimum debt requirements

would be large enough to not only cover substantial losses at

the subsidiary, but would also be sufficient to recapitalize the

ongoing entity to a degree that attracts private market capital.

Mr. Murton then introduced the last panelists of the

meeting, Mr. Wall and F. Angus Tarpley III, Counsel, Complex

Financial Institutions Section, Legal Division, advising that

they would provide an update on the FDIC's international

coordination efforts. He briefly discussed some of the FDIC's

outreach efforts to other jurisdictions, noting that the FDIC

has been engaged with the Bank of England on a number of fronts,

including the release of a joint paper a year ago, a staff-level

tabletop exercise involving the discussion of potential crossborder resolution issues; that FDIC has engaged the European

Commission, establishing a working group to exchange views on

resolution and deposit insurance; and that FDIC has engaged in

multi-lateral dialogue with the Financial Stability Board

{"FSB") on cross-border resolution issues. Chairman Gruenberg

elaborated on Mr. Murton's comments, advising that the FDIC also

conducted a tabletop exercise last year with the principals of

the U.S. financial regulatory agencies, which focused on the

discussion of the agencies' roles and key considerations in

various hypothetical scenarios including a potential Title II

process; and that the tabletop exercise was extremely valuable

in getting the responsible agencies to discuss key

considerations in a Title II process, what the respective roles

would be and how the FDIC would utilize its Title II authority.

He emphasized that there would be significant value to

conducting similar tabletop exercises with the principals of key

foreign jurisdictions to discuss issues for consideration in a

cross-border scenario, build relationships, and gain a mutual

understanding of the regulatory system of each jurisdiction. He

also commented that the FDIC has worked together with the Bank

of England, the German Federal Financial Supervisory Authority

("BaFin"), and the Swiss Financial Market Supervisory Authority

("FINMA") to develop a joint letter to the International Swap

and Derivatives Association ("ISDA") concerning how qualified

financial contracts could be modified to facilitate a crossborder resolution; and that the FDIC's ongoing engagement with

the principals of other jurisdictions has helped to build

December 11, 2013
84

institutional relationships and promote a broader discussion of

cross-border issues.

Mr. Wall then discussed the joint letter to ISDA concerning

the disorderly termination of derivatives contracts and

recommending amendment of ISDA's standard documentation to

provide a short-term stay of early termination rights and other

remedies on the basis of the commencement of an insolvency or

resolution proceeding or exercise of a resolution power with

respect to a counterparty or its specified entity, guarantor, or

credit support provider. He noted that there are two approaches

to address the destabilizing effect of wholesale termination of

derivative portfolios in the context of a resolution: one

approach is through statutory regimes, such as the comprehensive

approach of the Dodd-Frank Act or the provisions in the European

Union's ("EU") proposed resolution directive, that impose a stay

and other remedies; and a second approach is through changes to

the language in the standardized documentation of private

contracts used to set up derivative contracts to provide for a

voluntary stay. He also briefly discussed other remedies,

including: the nullification of termination rights under certain

conditions, such as transfer of the contracts to a bridge

institution; "cross-default" provisions that would prohibit

default or termination against a subsidiary as a result of the

parent's insolvency; and provisions that would protect against

pre-default actions.

Next, Mr. Tarpley briefly summarized the recent EU efforts

to develop a comprehensive package of financial reforms with

respect to resolutions, noting that these initiatives include:

(1) an EU resolution and recovery directive ("RRD"); (2) a

single supervisory mechanism ("SSM"); and (3) a single

resolution mechanism ("SRM"). The RRD in its current draft

form, he explained, would establish a framework for EU member

states for the resolution of banks and certain other financial

institutions with a suite of powers similar to those exercised

by the FDIC under its statutory authorities. He emphasized that

the directive would not look the same in every member state

within the EU because it would be implemented at the member

state level, but it would provide a principle-based approach to

harmonizing resolution, particularly cross-border resolution.

He continued, noting that the SRM in its current draft form

covers Euro zone members and those non-Euro zone members who

choose to join, and would function in tandem with the RRD to

provide a framework of resolution powers and authorities.

Finally, he noted that the SSM creates a new system of European

financial supervision, which would involve the European Central

December 11, 2013
85

Bank and national authorities of Euro zone member states. With

respect to the impact of these EU developments on the FDIC's

efforts, he advised that these initiatives provide a basic

framework analogous to some of the tools and resources to those

used by the U.S. authorities, including the orderly liquidation

authority under Title II; and that, once these new powers are

implemented, the similarities between the U. S. and a number of

different jurisdictions should provide a basis for increased

coordination on addressing cross-border resolution issues.

During the discussion that followed, Mr. Johnson noted that

there are significant differences between the EU and the U.S.

regarding their priorities with respect to the resolution

approach and who bears what costs under some situations. In

response, Chairman Gruenberg indicated that, at least with

respect to the jurisdictions the FDIC has most recently engaged,

there appears to be public resistance to the type of open-ended

support that has been provided in the past, and a real sense

that a different approach is necessary; that the directive for

authorities at the national level on recovery and resolution is

likely to be completed; that the single supervisory mechanism

has been approved and is in the process of implementation; and

that it appears the EU recognizes the value of establishing a

European resolution mechanism as a compliment to their

supervisory authority. Noting that the FDIC's SPOE strategy

document called attention to the ring fencing problem, Mr. Cohen

emphasized that dealing with the issue of ring fencing is

critical to achieving international resolutions.

Mr. Murton went on to discuss the FSB. He pointed out that

the FSB has identified key attributes of effective resolution

regimes for financial institutions; that the FSB will be

assessing member countries' compliance with the key attributes;

and that the key attributes have many of the same

characteristics and are consistent with the powers provided

under the Dodd-Frank Act, requiring consideration of crossborder cooperation and resolution incentives, statutory

mandates, recovery and resolution plans, and the establishment

of crisis management groups with other key jurisdictions to

discuss cross-border resolution. Noting that information

sharing and access to confidential supervisory information

between authorities has been a significant problem in the past,

Mr. Kohn asked whether this problem has been overcome. In

response, Mr. Tarpley advised that one of the components of the

key attributes deals with the essential elements of cross-border

cooperation agreements that set forth the framework for

information exchange, and that the regulators have worked very

December 11, 2013
86

diligently to develop cooperative agreements within context of

the crisis management groups to overcome some of those

impediments. Mr. Murton concluded the discussion by advising

that, while not a member of the FSB, the FDIC participates in

the Resolution Steering Committee established by the FSB; and

that a number of initiatives will be pursued in the next year,

including an initiative on "gone-concern loss absorbing

capacity" or "GLAC" that is similar to the Federal Reserve's

expected minimum long-term debt requirement.

In bringing the meeting to a close, Chairman Gruenberg

thanked the Committee members for their contributions, noting

that the group brings invaluable experience and perspective to

this complex policy area. He advised that staff would follow up

with Committee members individually to identify a list of key

issues on which the Committee should focus its efforts. He

observed that in the U.S., as well as in other jurisdictions,

the approach taken to deal with the financial crisis in 2008

held the system together, but represents an approach that is

unlikely to have much receptivity for the future. He emphasized

that, when an institution gets into difficulty, the focus would

likely be on Title II, with an expectation of accountability for

these firms while managing the fallout from a systemic

standpoint; and that that is the foundation of the FDIC's

efforts, which is not unique to the U.S. He advised that there

appears to be a real shift in perspective globally that there

are limits to the ability to provide open-ended public support

for these global financial institutions; and that there is a

desire to have a different approach the next time around, with

accountability for the stakeholders of these companies. He

concluded by noting that some progress has been made, but that

there is more work to be done.

There being no further business, the meeting was adjourned

at 3:05 p.m.

Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

and Committee Management Officer

FDIC Systemic Resolution Advisory

Committee

December 11, 2013
Minutes

of

The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

December II, 2013 - 8:47 A.M.

I hereby certify that, to the best of my knowledge, the attached

minutes are accurate and complete.

'~ru(~~

Chairman

Board of Directors

Federal Deposit Insurance Corporation