william c dudley : title ii resolution, a useful tool but not a panacea remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the 2013 resolution conference “ planning for the orderly resolution of a global systemically important bank ”, washington dc, 18 october 2013. * * * the topic of how systemically important financial institutions ( sifis ) will be resolved is a very important subject. as we saw during the financial crisis, the failure of lehman brothers generated huge shocks across the global financial system that led to a deep global downturn. that is not an acceptable regime and i am very glad we are working hard to change it. i thank the organizers for giving me the opportunity to make some short remarks. today, i ’ m going to take a somewhat broader view than some of the other speakers, focusing on two issues : • some outstanding questions about how the “ single point of entry ” strategy under the title ii resolution regime would work in practice. • how the resolution regime fits within the broader supervisory agenda of ending “ too big to fail ” and making the financial system more resilient and robust. as always, what i have to say today reflects my own views and not necessarily those of the federal reserve system. the first point i ’ d make is that i very much endorse the single point of entry framework for resolution as proposed by the federal deposit insurance corporation ( fdic ). i think it is the best plan for implementing title ii given the complexity and scope of large, global financial institutions and i also think it is well - suited to the u. s. bank holding company framework. by assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “ top - down ” resolution strategy will facilitate continuity for the critical services performed by the firm ’ s subsidiaries. this will reduce the costs associated with the failure of the parent company and reduce the degree of disruption to financial markets and financial stability. while the title ii single point of entry strategy holds tremendous promise, i think it is important not to declare victory prematurely. first, there are still significant issues about how the resolution of a large systemically complex firm would work in practice. second, even assuming that our efforts to overcome these challenges are ultimately fully successful, resolution is still likely to represent a “ second best ” outcome compared to preventing a systemically important financial institution from failing in the

. regime, based on basel i. the global banks ’ concerns about the bifurcated u. s. application depend in part on whether they are based here or abroad. for foreign banks the issue is the additional complexity and perceived inequity they will face if they have chosen to operate in the rest of the world under the foundation approach for credit risk, an approach which will not be permissible in the united states. ( i am making the reasonable assumption that the foreign banks whose u. s. subsidiaries would be required to use the advanced approach, or who, for competitive or other reasons, choose the advanced approach in the united states, will be operating in their home country under the foundation approach at least. ) for u. s. - based banks the fear is that foreign rivals may get a competitive edge for one year through lower regulatory capital requirements in some markets ; the potential head start for foreign banks arises because the permissible start date for the foundation and standardized versions is the beginning of 2007, while the advanced approach, with its greater complexity for banks and supervisors, starts in all markets at the beginning of 2008. a foreign bank under the foundation approach at home but under the advanced approach in the united states would have to determine two variables in the united states for its corporate exposures that would not be required of its consolidated entity : loss given default ( lgd ) and exposure at default ( ead ). for its consolidated entity at home it would need to calculate only the probability of default. the u. s. subsidiary might well find it a real challenge to gather the needed data and generate the lgd and ead parameters required in the united states ; doing so would certainly add cost, even for an entity using the full foundation approach at home. the u. s. authorities did not make their decision to require the advanced approach lightly. given the structure and size of our markets, we believe it necessary that large entities operating here use sophisticated techniques for risk measurement and management that rely on bank estimates of all the risk variables required by the advanced approach. nonetheless, we understand our global responsibilities for cooperation. both bilaterally and through the aig, we will continue to work with u. s. subsidiaries of foreign banks and their home supervisors on transition steps, where necessary, although we expect to continue to require full implementation within a reasonable period of time. these transition steps could involve, for example, relying on conservative estimates of the lgd and ead parameters when the