WASHINGTON (Reuters) - Federal Reserve staff have expressed concerns to U.S. lawmakers that no government agency is currently prepared to take on the job of shutting down any failing financial institution whose collapse would endanger the financial system.
“No existing government agency has the requisite resources and expertise to step into this role easily,” Fed staff said in an analysis of proposed legislation that would allow the government to shut down a major firm if it was failing.
A copy of the analysis was obtained by Reuters.
As one of the worst financial crises since the Great Depression unfolds, politicians and authorities worldwide are wrestling with how to strengthen financial supervision to prevent a similar calamity from happening again.
U.S. Treasury Secretary Timothy Geithner on Thursday unveiled a broad regulatory overhaul that would create a single regulator to oversee broad, system-wide financial health as well as to bring free-wheeling pools of capital, such as hedge funds and private equity funds, under the supervisory umbrella.
Geithner earlier in the week proposed legislation giving the government the ability to engineer the orderly closure of a failing major financial firm. That proposal would put the Federal Deposit Insurance Corp in charge of the wind-down after getting approval from the Fed and the Treasury.
Commenting on an earlier draft of the legislation, Fed staff said that the FDIC’s bank resolution regime would provide “a very good source of ideas” for guidelines for closing financial firms, but warned the model was untested for large, complex banks or other financial firms.
“We must provide for the acquisition of such a capacity, either through building up of internal capacities or through bringing in outside expertise as needed,” Fed staff wrote.
The authors of the analysis said they were preparing it as a matter of “technical assistance,” and that the Fed board had not formulated its views on a new resolution framework.
The commentary was based on a draft of the legislation that left it up to the Treasury Secretary to decide on a case-by-case basis whether a bank regulator, the Securities and Exchange Commission or another agency would be responsible for the wind-down.
Geithner told Congress on Thursday during testimony that the administration is proposing letting the FDIC run the new regime.
Separately, an influential U.S. bank industry group opposed vesting the FDIC with those powers. Putting the agency in charge of closing troubled non-bank financial firms would detract from the FDIC’s job of insuring bank deposits, the American Bankers Association said.
In their analysis, Fed staff recommended that both the Treasury and the Fed be involved in any decision to invoke the wind-down authority, and that Congress set a high standard for invoking the authority.
They also noted that there might be not be need to shut down systemically-important institutions for years to come, but in the event, any agency with that responsibility would need to be prepared to act suddenly.