FDIC Quarterly 25 2011, Volume 5, No. 2

The following are remarks by FDIC Chairman Sheila C. Bair 

on May 5, 2011, before the 47th Annual Conference on 

Bank Structure and Competition sponsored by the Federal 

Reserve Bank of Chicago.

I am very pleased to have the opportunity to address 

this conference once again as FDIC Chairman. For 

nearly 50 years, the Bank Structure Conference has 

been a vitally important forum for addressing the challenges facing the financial services industry. It all began 

in the early 1960s as a series of symposia on competition and market structure in what was then, in many 

respects, a much more heavily regulated banking industry. In those days, branching restrictions, product and 

service limitations, and interest-rate ceilings were the 

norm. But by the 1970s, the focus shifted somewhat to 

the need for banking deregulation in a fast-changing 

financial landscape.

With the crises of the 1980s, the issues of moral 

hazard—resulting from the federal safety net and the 

resulting need for better market discipline—came to the 

fore. And more recently, the emphasis has shifted again 

to financial innovation and nonbank financial providers, followed, of course, by debate as to the causes of the 

recent crisis and the reforms needed to prevent such a 

disaster from recurring.

Besides its uncanny knack for identifying emerging 

policy issues, this conference series is also remarkable 

for the way it brings together three groups of people—

academics, bankers, and regulators—who sometimes 

speak different languages, but who must work together 

to resolve those difficult issues. And what keeps you 

coming back to this conference year after year, I 

suspect, is a shared commitment to some common goals.

All of us have a vital stake in financial stability. And 

we all want to see a financial system that consistently 

supports the real economy by efficiently allocating capital and credit to its highest and best use.

Balancing the Government’s Role

Because banking and finance are so critical to our economy, and because they are prone to bouts of instability, 

we have long recognized a vital—but limited—role for 

government in our financial system. Public confidence, 

market liquidity, and financial stability are all inherently public goods. Only government has the capacity 

to carry out prudential supervision, serve as lender of 

last resort, provide iron-clad guarantees that can forestall runs, and promptly and efficiently resolve banking 

institutions when they fail.

Under the guidance of statute, the FDIC, the Federal 

Reserve, and the other banking authorities have long 

sought to achieve a delicate balance in the role that 

government plays in the banking industry. One important task is to promote confidence and stability through 

the deposit insurance guarantee and the lender-of-lastresort function. But it is equally important that we 

uphold regulatory discipline through prudential supervision and promote market discipline by clearly limiting 

the extent of the government backstop.

In the wake of the recent crisis, we are working to 

implement an updated statutory mandate under the 

Dodd-Frank Act. As we do so, there is once again much 

debate over the lessons of the crisis and the proper role 

of government in the financial sector.

On one hand, there is concern that new regulations 

could impose onerous costs on banks and our economy, 

stifling financial innovation and economic growth. On 

the other, there is genuine alarm about the immense 

scale and seemingly indiscriminate nature of the 

government assistance provided to large banks and 

nonbank financial companies during the crisis, and 

what effects these actions will have on the competitive 

landscape in banking.

These bailouts were necessary because these institutions 

had been permitted to become so large, complex, and 

interconnected that the prospect of their failure was a 

threat to overall financial stability. They were Too Big 

to Fail. Richmond Federal Reserve Bank President 

Jeffrey Lacker recently reminded us of the drawbacks of 

a federal safety net policy of constructive ambiguity that 

allows regulators to talk tough during good times, but 

keep their options open during a crisis. But if there ever 

was a constructive ambiguity about the scope of the 

federal safety net and the existence of Too Big to Fail, 

Feature Article:

“We Must Resolve to End Too Big to Fail”
FDIC Quarterly 26 2011, Volume 5, No. 2

Lehman’s failure, the process has cost over $1.2 billion 

in legal and other professional fees, and many creditors 

still don’t know what their claims will be worth.

Anticipating the complications of this process, counterparties across the financial system reacted to the 

Lehman failure by running for the safety of cash and 

other government obligations. Subsequent days and 

weeks saw the collapse of interbank lending and 

commercial paper issuance, and a near complete disintermediation of the shadow banking system. The only 

remedy was massive intervention on the part of governments around the world, which pumped equity capital 

into banks and other financial companies, guaranteed 

certain nondeposit liabilities, and extended credit 

backed by a wide range of illiquid assets to banks and 

nonbank firms alike. Even with these emergency 

measures, the economic consequences of the crisis 

have been enormous.

Competitive Implications of Too Big to Fail

The dilemma policymakers faced in the failure of large, 

complex financial institutions resembles a classic 

hostage drama, where the imperative of saving lives in 

the short run comes at the expense of encouraging more 

hostage-taking in the future. And so it is with the largest U.S. banks and other financial companies, which 

have every incentive to render themselves so large, so 

complex, and so opaque that no policymaker would 

dare risk letting them fail in a crisis. With the benefit of 

this implicit safety net, these institutions are insulated 

from the normal discipline of the marketplace that 

applies to smaller banks and practically every other 

private company.

Understanding the game, and having recently seen the 

nation’s largest financial institutions receive hundreds 

of billions of dollars in taxpayer assistance, the market 

appears to expect more of the same going forward. In 

February, Moody’s reported that its ratings on the senior 

unsecured debt of eight large U.S. banking organizations received an average “uplift” of 2.2 ratings notches 

because of the expectation of future government 

support. Meanwhile, the largest banks continue to 

enjoy a large competitive advantage over community 

banks in funding markets. In the fourth quarter of last 

year, the average interest cost of funding earning assets 

for banks with more than $100 billion in assets was 

about half the average for community banks with less 

than $1 billion in assets. Indeed, I would also argue that 

well-managed large banks are disadvantaged. Too Big to 

it was surely made obsolete by the events of late 2008 

and early 2009.

In the wake of that experience, all of us in this room 

have a vital interest and a collective responsibility to do 

what it takes to restore the balance between a safety net 

that ensures stability and public confidence, and the 

need to place clear and credible limits on that safety net. 

In short, we must restore market discipline in the financial sector. That will be the focus of my remarks today.

The Roots of the Problem

The financial crisis of 2008 centered on the so-called 

shadow banking system—a network of large-bank affiliates, special-purpose vehicles, and nonbank financial 

companies that existed largely outside of the prudential 

supervision and capital requirements that apply to 

federally insured depository institutions in the U.S. In 

addition, the shadow banking system also fell largely 

outside of the FDIC’s process for resolving failed insured 

financial institutions through receivership.

Several large, complex U.S. financial companies at 

the center of the 2008 crisis could not be wound down 

in an orderly manner when they became nonviable. 

Major segments of their operations were subject to the 

commercial bankruptcy code, as opposed to bank receivership laws, or they were located abroad and therefore 

outside of U.S. jurisdiction. The size and complexity of 

these institutions, and the inadequacy of the bankruptcy 

process as a means to preserve value after their failure, 

rendered these companies Too Big to Fail.

In the heat of the crisis, policymakers frequently 

resorted to bailouts instead of letting these firms 

collapse into bankruptcy. The fear was that the losses 

generated in a failure would cascade through the financial system, freezing financial markets and stopping the 

economy in its tracks. The worst fears of policymakers 

were realized when Lehman Brothers—a large, complex 

nonbank financial company—filed for bankruptcy on 

September 15, 2008.

The long-term outcome for Lehman creditors clearly 

demonstrates the shortcomings of bankruptcy as a 

means to resolve failed financial companies. The firm 

managing the Lehman bankruptcy reports that more 

than $75 billion in value was destroyed by the bankruptcy process itself, including tens of billions of dollars 

from the inability to roll over valuable derivatives 

contracts. More than two-and-a-half years after 
FDIC Quarterly 27 2011, Volume 5, No. 2

Chairman’s Remarks

would be a faster resolution of claims against the failed 

institution, smaller losses for creditors, reduced impact 

on the wider financial system, and an end to the cycle 

of bailouts.

The history of the recent crisis is replete with examples 

of missed opportunities to sell or recapitalize troubled 

institutions before they failed. But with bailout off the 

table, management will have a greater incentive to 

bring in an acquirer or new investors before failure, and 

shareholders and creditors will have more incentive to 

go along with such a plan in order to salvage the value 

of their claims. These new incentives to be more proactive in dealing with problem SIFIs will reduce their 

incidence of outright failure and also lessen the risk of 

systemic effects arising from such failures.

Doubts and Misconceptions about the 

New Resolution Framework

The problem is that, even as we put this game plan into 

action, some still don’t believe that policymakers have 

the means or the will to take the difficult steps needed 

to close down the SIFIs in a crisis, and will ultimately 

back down and just bail them out again. Part of the 

problem is a misunderstanding of the process. And part 

of it is a low opinion of the political will in Washington 

to make hard and unpopular decisions.

For example, we have heard some say that being designated as a SIFI will confer a competitive advantage by 

anointing an institution as Too Big to Fail. But the 

reality is that SIFIs will be subject to heightened supervision and higher capital requirements. They will also 

be required to maintain resolution plans and could be 

required to restructure their operations if they cannot 

demonstrate that they are resolvable.

Needless to say, nobody is signing up in advance to be a 

SIFI. In fact, it is just the opposite. It might be far 

better to fall just short of SIFI status in terms of size, 

complexity, and interconnectedness. In that case, your 

institution would be spared all of the additional regulatory burdens, but policymakers could still face significant challenges in effecting an orderly resolution in a 

crisis. That’s why it is important that the FSOC move 

forward and develop some hard metrics to guide the 

SIFI designation process. We need to be able to gather 

information on a broad range of potential SIFIs in order 

to develop a sense of the difficulties that might arise in 

resolving them.

Fail narrows the funding advantage they would otherwise enjoy over weaker competitors.

This situation can only be regarded as a new and 

dangerous form of state capitalism, where the market 

assumes large, complex, and powerful financial companies are in line to receive generous government subsidies in times of financial distress. Unless reversed, we 

can expect to see more concentration of market power 

in the hands of the largest institutions, more complexity 

in financial structures and relationships, more risktaking at the expense of the public, and, in due time, 

another financial crisis.

The New SIFI Resolution Framework

At the core of the reform legislation passed last summer 

are measures that create a new resolution framework 

that will apply to the so-called systemically important 

financial institutions, or SIFIs, that are associated with 

the problem of Too Big to Fail.

This new SIFI resolution framework has three basic 

elements. First, the new Financial Stability Oversight 

Council, chaired by Treasury and made up of the other 

financial regulatory agencies, is responsible for designating SIFIs based on criteria that are now being established by regulation. Once designated, the SIFIs will be 

subject to heightened supervision by the Federal 

Reserve and required to maintain detailed resolution 

plans that demonstrate that they are resolvable under 

bankruptcy—not bailout—if they should run into 

severe financial distress.

Not only will these plans provide valuable advance 

information that will assist in implementing an orderly 

resolution, but the law also authorizes the FDIC and the 

Federal Reserve to require, if necessary, changes in the 

structure or activities of these institutions to ensure that 

they meet the standard of being “resolvable” in a crisis.

Finally, the law provides for a third alternative to bankruptcy or bailout—an Orderly Liquidation Authority, or 

OLA, that gives the FDIC many of the same trustee 

powers over SIFIs that we have long used to manage 

failed-bank receiverships. While this authority strictly 

prohibits bailouts, the FDIC could use it to conduct 

advance planning, to temporarily operate and fund the 

institution under government control to preserve its 

value as a going concern, and to quickly pay partial 

recoveries to creditors through advance dividends, as we 

have long done in failed-bank receiverships. The result 
FDIC Quarterly 28 2011, Volume 5, No. 2

When a large, complex financial institution gets into 

trouble, time is the enemy. The larger, more complex, 

and more interconnected a financial company is, the 

longer it takes to assemble a full and accurate picture of 

its operations and develop a resolution strategy. By 

requiring detailed resolution plans in advance, and 

authorizing an on-site FDIC team to conduct pre-resolution planning, the SIFI resolution framework regains 

the informational advantage that was lacking in the 

crisis of 2008.

The FDIC recently released a paper detailing how the 

filing of resolution plans, the ability to conduct advance 

planning, and other elements of the framework could 

have dramatically changed the outcome if they had 

been available in the case of Lehman. Under the new 

SIFI resolution framework, the FDIC should have a 

continuous presence at all designated SIFIs, working 

with the firms and reviewing their resolution plans as 

part of their normal course of business. So our presence 

will in no way be seen as a signal of distress. Instead, it 

is much more likely to provide a stabilizing influence 

that encourages management to more fully consider the 

downside consequences of its actions, to the benefit of 

the institution and the stability of the system as a whole.

As far-reaching as these changes are, their ultimate 

effectiveness will still depend on the willingness of the 

FDIC and the Federal Reserve to actively use their 

authority to require organizational changes that 

promote the ability to resolve SIFIs. As currently structured, many large banks and nonbank SIFIs maintain 

thousands of subsidiaries and manage their activities 

within business lines that cross many different organizational structures and regulatory jurisdictions. This can 

make it very difficult to implement an orderly resolution of one part of the company without triggering a 

costly collapse of the entire company.

To solve this problem, the FDIC and the Fed must be 

willing to insist on organizational changes that better 

align business lines and legal entities well before a crisis 

occurs. Unless these structures are rationalized and 

simplified in advance, there is a real danger that their 

complexity could make a SIFI resolution far more costly 

and more difficult than it needs to be.

Such changes are also likely to have collateral benefits 

for the firm’s management in the short run. A simplified organizational structure will put management in a 

better position to understand and monitor risks and the 

Ultimately, the “resolvability” of an institution should 

determine if it is designated as a SIFI. Upholding this 

standard will be essential if we are to avoid the “deathbed designation” of SIFIs that would put the resolution 

authority in the worst possible position in a crisis.

Misunderstandings also abound as to the nature of the 

Orderly Liquidation Authority. Some have called it a 

bailout mechanism, while others see it as a fire sale 

that will destroy the value of receivership assets. 

Neither is true.

While it is positioned as a backup plan in cases where 

bankruptcy would threaten to result in wider financial 

disorder, the OLA is actually a better-suited framework 

for resolving claims against failed financial institutions. 

It is a transparent process that operates under fixed rules 

that prohibit any bailout of shareholders and creditors 

or any other type of political favoritism, which is a 

legitimate concern in the case of an ad-hoc emergency 

rescue program. Not only would the OLA work faster 

and preserve value better than bankruptcy, but the 

regulatory authorities who will administer the OLA are 

in a far better position to coordinate with foreign regulators in the failure of an institution with significant 

international operations.

The FDIC has made considerable progress in forging 

bilateral agreements with other countries that will facilitate orderly cross-border resolutions. And we currently 

co-chair the Cross Border Resolutions Group of the 

Basel Committee.

It is worth noting that not a single other advanced 

country plans to rely on bankruptcy to resolve large, 

international financial companies. Most are implementing special resolution regimes similar to the OLA. 

Under the OLA, we can buy time, if necessary, and 

preserve franchise value by running the institution as a 

bridge bank, and then eventually sell it in parts or as a 

whole. It is a game-changer in terms of the ability to 

provide continuity and minimize losses in financial 

institution failures.

Resolution Plans Must Be Credible and Actionable

A major improvement in the SIFI resolution process is 

also one that, in my opinion, has been somewhat 

underestimated by the skeptics. And that is the requirement for SIFI resolution plans.
FDIC Quarterly 29 2011, Volume 5, No. 2

Chairman’s Remarks

But, knowing this group as I do now, after almost five 

years as FDIC Chairman, I think you have a far more 

productive role to play in shaping the outcome of this 

critical policy debate. I urge you to actively use your 

influence to ensure that the new SIFI resolution framework will be equal to the great task that is before us. 

Conduct your own analysis of the regulations as they 

are proposed, and engage the process in comment 

letters, op-eds, blog posts, and research papers. Ask the 

hard questions that need asking:

Are regulators carrying out the intent of the reforms?

Are all the right firms designated as SIFIs?

Are they developing credible resolution plans?

Are the largest financial companies structured in a way 

that renders them resolvable in a crisis?

Is progress being made in coordinating resolution 

regimes on the international front?

And, most important, are we meeting the market test of 

credibility? The answer to this question will be evident 

in credit spreads, funding costs, and other market 

indicators.

Conclusion

While it is important that you critique the actions of all 

parties to this debate—including regulators, financial 

companies, and other market participants—it is equally 

important that you use your knowledge and your influence to help explain the parameters of this debate and 

the stakes involved to the American people. These 

issues are complex and are generally not well-understood by the public. But the people in this room are 

among the world’s leading experts on these issues. With 

your active engagement, I am confident that we can 

build the broad-based political support that will be 

needed to change the status quo and build the foundation for a stronger and more competitive financial 

sector in the years ahead.

inter-relationships among business lines, addressing 

what many see as a major challenge that contributed to 

the crisis. That is why—well before the test of another 

major crisis—we must define high informational standards for resolution plans and be willing to insist on 

organizational changes where necessary in order to 

ensure that SIFIs meet the standard of resolvability.

What You Can Do to Shape the Outcome

In the wake of a crisis, there is a natural tendency for 

memories to fade. The economic pain caused by the 

financial crisis will subside in time, and even the Bank 

Structure Conference will eventually move on to 

consider other topics and other challenges. In an everchanging financial landscape, it can be difficult to 

maintain a long-term focus on the lessons of the last 

crisis and the imperatives of preparing to deal with the 

next one. Most of all, it is extremely difficult to overcome the political resistance that comes from large, 

powerful financial organizations when they are asked to 

make potentially costly changes at a time when the 

danger of a financial crisis appears remote.

As I mentioned at the outset, everyone in this room has 

a vital stake in the outcome of these reforms. And, 

because this is such a knowledgeable and influential 

group, all of you have a role to play in their failure or 

their success. Given the challenges before us, one 

response that many seem to have is a certain cynicism 

and detachment about the process. It’s easy to be a 

doubter and simply resign yourself to the idea that it is 

just too difficult, and that we will never be able to 

really put an end to Too Big to Fail.

If enough of us do that, then the ratings agencies will 

end up being right in terms of their expectation of 

future government support. Open-ended state subsidies 

to large financial companies in times of crisis could 

become a permanent part of the landscape, with all of 

the attendant implications that has for risk-taking and 

the competitive structure in banking.