4  BIS Review 140/2010  The FDIC has these powers for banks and thrifts as well as a great deal of experience in managing bank failures and has demonstrated the utility and flexibility of its tools. A positive development is that many countries are considering or have adopted legislation giving the financial resolution authority similar powers. The U.S. Dodd-Frank Act passed in the summer broadens the scope of the FDIC’s resolution powers, although in a carefully circumscribed manner. The Dodd-Frank Act allows the FDIC to resolve not only a bank, but a financial holding company of a banking organization or a nonbank financial institution, if the requisite recommendations and conditions are present, among them, that the failure is a threat to financial stability. When the FDIC is appointed receiver, it has available its full set of resolution powers, including the ability to create a bridge company for a nonbank financial institution. The Dodd-Frank Act also strengthens the supervisory regime for systemically important financial firms. It empowers the newly formed Financial Stability Oversight Council (FSOC) to designate bank and nonbank firms as systemically important. The FSOC has just published an advanced notice of proposed rulemaking soliciting comments on the criteria for designating nonbank financial companies systemically important. Companies that are so designated will be subject to consolidated oversight from the Federal Reserve. The U.S. supervisory and resolution authorities have also begun the process of resolution planning, as recommended by the CBRG.

I will conclude by returning to my starting point, to the importance and the scarcity of time in dealing with a troubled financial firm. The important role time plays at a failing firm The seeds of any financial failure are generally planted years earlier. The cycle is familiar to us all – in good times, most business strategies thrive. Financial institutions commence an  BIS Review 140/2010  1  activity that has high initial marginal returns; over time the activity attracts more competition, pricing goes down and risk appetite goes up. Overexpansion leads to an inevitable correction, with the losses incurred testifying to the long-term unsuccessful nature of the strategy. U.S. banking, securities and finance companies in the early 1990s experienced the late stage of just such a cycle in which commercial real estate and leveraged buyout lending overexpanded. The result was that many large financial institutions had to be merged into others or unwound. Banking supervisors responded to these problems by requiring banks with large, problematic exposures to implement a three-part program. First, the bank comprehensively identified its problem loans and assigned them to workout specialists. Second, the bank developed and executed a capital plan and strengthened its liquidity. Third and essential to raising new capital, the bank developed a new business plan demonstrating its ability to return to profitability. This program worked, in large part because it was applied timely enough. Stylized facts about time’s role on the value of a failing firm created urgency in implementing the program.