FDIC seen contender to unwind financial giants

WASHINGTON Tue Mar 10, 2009 4:43pm EDT

U.S. Federal Reserve Chairman Ben Bernanke speaks at the Council on Foreign Relations in Washington March 10, 2009. Bernanke said on Tuesday that he did not favor suspending mark-to-market financial accounting, but understood the problem of valuing assets in highly disrupted markets. REUTERS/Yuri Gripas

U.S. Federal Reserve Chairman Ben Bernanke speaks at the Council on Foreign Relations in Washington March 10, 2009. Bernanke said on Tuesday that he did not favor suspending mark-to-market financial accounting, but understood the problem of valuing assets in highly disrupted markets.

Credit: Reuters/Yuri Gripas

WASHINGTON (Reuters) - U.S. policymakers must develop a way to handle the failure of a systemically important, financial conglomerate, possibly modeled after the Federal Deposit Insurance Corp's procedure for smaller banks, Federal Reserve Chairman Ben Bernanke said on Tuesday.

The FDIC has hinted it could take on that job, with Chairman Sheila Bair saying recently that the agency's model for failed banks works well. But she said the FDIC would need more authority and resources to resolve financial conglomerates.

The FDIC insures about $4.5 trillion of deposits at more than 8,000 banks. It has the authority to take over an insolvent depository bank, but cannot put a bank's parent holding company into receivership.

For example, the FDIC would have the authority to take over Citigroup's Citibank depository banking unit if it was deemed insolvent. But the agency would not have the authority -- or the resources -- to bring all of Citigroup into receivership.

"We have discussed the need for dealing with large non-bank financial institutions -- similar to the FDIC's authority for chartered institutions," FDIC spokesman Andrew Gray told Reuters without mentioning any specific firms. "We think that there is a critical need for this, and that our resolution process has worked well."

Citigroup Chief Executive Vikram Pandit said on Tuesday the firm was profitable in the first two months of 2009 and is confident about its capital strength, easing concerns about its survival prospects.

Without identifying any institutions by name, Bernanke said the United States "needs improved tools to allow the orderly resolution" of a big, systemically important financial firm.

He noted that the FDIC's existing procedures for smaller banks let a government agency take control of an insolvent institution's operations and establish a "bridge" bank that can either liquidate or find a buyer for the firm. Bernanke made the comments in a speech to the Council on Foreign Relations.

Although he stopped short of calling for the FDIC to take on that role for large bank holding companies and other financial giants, Bernanke said a bridge bank approach would limit market disruption and any adverse impact of government intervention.

U.S. markets have been rattled by the financial problems at American International Group, Bear Stearns and Lehman Brothers. All three tested regulators' powers because there was no mechanism in place to orderly unwind the systemically-important institutions. U.S. officials brokered a sale of Bear Stearns, let Lehman file for bankruptcy, and stepped in with billions of dollars of support for AIG.

Bernanke also said unwinding a big bank would need a "mechanism to cover the costs of the resolution."

FDIC's Bair has been lobbying to create that funding mechanism.

The FDIC faces a shrinking pool of funds to cover the costs of failed banks. If that industry-funded deposit insurance fund dries up, the FDIC has the ability to tap a line of credit with the U.S. Treasury Department.

Bair wants Congress to almost triple the FDIC's line of credit with Treasury to $100 billion from $30 billion. A Senate bill would triple that borrowing authority and temporarily allow the FDIC to borrow $500 billion if the Fed and Treasury deem it systemically important, perhaps to resolve a large financial firm.

Also, Bair is attempting to boost the FDIC's funding resources by imposing systemic risk fees on very large financial firms, not just its member banks.

"Our assessment authority only extends to insured banks," Bair said last week in a speech at a meeting of international bankers. "This is something we are trying to get fixed."

The missing piece is legislation giving the FDIC the specific authority to unwind a major financial conglomerate.

Democrat Barney Frank, the chairman of the House Financial Services Committee, recently said a high priority of his is to find a way to unwind failed, non-bank financial firms.

"We have in the federal system now a pretty good way to unwind failed banks. And the FDIC has done a pretty good job with that," Frank said. "What we don't have is a similarly orderly way to unwind failed non-banks."

The top Republican on the Senate Banking Committee also endorsed the FDIC's expertise.

"The Fed could learn something from the FDIC" in dealing with insolvent banks, Alabama Sen. Richard Shelby told reporters on Tuesday.

(Reporting by Karey Wutkowski, additional reporting by Kim Dixon; Editing by Tim Dobbyn)

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