The Federal Deposit Insurance Corp. (FDIC) unexpectedly delayed the release of an interim rule to create a resolution system for the largest, most-connected banks and nonbanks, saying it needed to consult with other regulators first.
The move underscored the difficulty of implementing the Dodd-Frank regulatory reform law, which requires regulators to act independently and in concert with other agencies. While the FDIC went forward Monday with a separate final rule to restrict securitizations, for example, the agency specifically included a provision that would make the statute automatically conform to any future joint regulatory action on the issue.
Regulators at the meeting made it clear that each step by any agency will be closely watched by other supervisors.
"The consultative process as part of the statutory requirement, that I know you will engage in, is something that has to be a dynamic, aggressive part of what we're going to do," said John Bowman, the acting director of the Office of Thrift Supervision (OTS) and a member of the board.
As late as the end of last week, the FDIC was planning to approve an interim rule Monday to begin implementing the new system — mandated by Dodd-Frank — for unwinding systemically important nonbanks. The rule was to set certain technical definitions, including which types of market participants would be excluded from enhanced relief in a resolution.
An interim rule would have put the new policy in place immediately, but allow for revision after public commenters and members of the Financial Stability Oversight Council (FSOC), which has yet to meet formally, were to provide their input.
But shortly before the meeting, amid concern the FDIC had not consulted enough in advance, the agency redrafted the policy as a proposal, and delayed action on it. The board is likely to vote later on the plan. "In order to provide some additional time for council members to offer their views and allow further consultation, today's meeting will provide a briefing for the board members," FDIC Chairman Sheila Bair said in a prepared statement. "We plan to ask for a notational vote next week after the FSOC has had its first meeting."
Despite delaying action, and not distributing the proposal to the public, the board did hear from FDIC staff on what it will entail.
Michael Krimminger, Bair's chief policy deputy, said the proposal was "very narrowly drawn" to address "certain discrete issues" relevant to the markets.
Chiefly, the proposal would set limitations on the types of investors that would qualify for extra relief when the FDIC took over a financial behemoth, Krimminger said. Under the law, the agency can make "additional payment" to certain participants exceeding what other similar creditors receive if it would be essential to operating the receivership or maximizing asset recoveries.
Krimminger said the proposal would clarify that shareholders, subordinated debt holders and "certain long-term bond holders will not be deemed to meet the statutory standard" for the enhanced coverage.
"These categories of creditors will not add to the franchise value or help maximize recoveries or provide services" essential "to the receivership or bridge," he said.
Krimminger said the proposal would make clear that all creditors would face risk of losses in an FDIC takeover of a systemically important firm. "Under the proposed regulation, and under the statue, all unsecured creditors are at risk, as well as secured creditors, of illiquid collateral," he said.
Other aspects of the proposal include discussion on which operations of the existing firm the FDIC could maintain in a receivership, and how contingent claims may be measured, he said.
The initial proposal, once approved by the board, would include a 30-day comment period. In addition, the proposal would include extensive questions for the public to comment on within a 90-day period. The more extensive comments would be used to help guide formation of a more comprehensive proposal to implement the resolution authority to be released early next year.
While the FDIC delayed action on its resolution plan, it moved forward with the securitization policy while still attempting to allow for more action across the agencies. As part of a yearlong effort, the FDIC finalized conditions for a "Safe Harbor" to be applied to securitized assets originated by commercial banks and thrifts.
Before this year, the agency had a long-standing policy not to seize securitized assets originated by failed banks, as long as the securitization met the characteristics of an off-balance-sheet sale. But with new accounting requirements forcing banks to move securitizations on their balance sheets, the FDIC needed to revisit the safe harbor.
The FDIC's final rule was largely unchanged from a May proposal. The safe harbor will only apply to assets for which there is a 5% retention minimum of the credit risk, and securitizations of residential mortgages are limited to no more than six capital tranches. The old safe harbor will still apply until the end of the year, when the new rule goes into effect.
One minor change from the proposal is that the final rule clarifies that securitizations issued by the government-sponsored enterprises do not qualify for the safe harbor. But board members were more focused on language in the rule stating that any future interagency rule implementing the retention requirements of Dodd-Frank would supersede the FDIC's rule.
Like the FDIC's safe harbor rule, the new law imposes a 5% retention requirement. However, unlike the agency's policy, Dodd-Frank allows regulators to identify certain standards of safe mortgages — referred to as "qualified residential mortgages" — that would not have to comply with the retention requirement.
In May, Bowman and then-Comptroller of the Currency John Dugan both voted against the FDIC's safe harbor proposal, saying the agency should not go it alone, and instead wait for a comprehensive approach from all the regulators.
But Bowman, while stressing the need for regulatory coordination, said he now supported the rule because of its "auto-conform" language.
"It is this language that allows me to vote" on this rule, he said.
But Dugan's substitute on the board, acting Comptroller John Walsh, said his agency's position has not changed. He said that the safe harbor rule goes beyond what Dodd-Frank intended and it would be better for regulators to all speak with one voice.
"The United States should have a single, straightforward regulatory framework for securitization that applies to all markets, all products and all securitizers," Walsh said. "It's important to note that the auto-conform provision pertains to the requirement to retain an economic interest and a portion of the credit risk of financial assets under the rule, but would not … necessarily apply to all features of securitizations."
But FDIC officials said the board could not afford to wait for the interagency process, and said the fact that the safe harbor rule covered more ground than Dodd-Frank was reason to support the FDIC policy.
"The purpose of Dodd-Frank was not to delay ongoing reforms, but to facilitate them," Bair said. "It is better … to make sure the 5% [minimum] is in place as we enter the process to develop strong underwriting standards with our colleagues."
The board separately proposed a rule implementing a provision of Dodd-Frank that requires FDIC coverage of all noninterest-bearing checking deposits through Dec. 31, 2012. The proposal, with comments due Oct. 15, is similar to the FDIC's Transaction Account Guarantee Program, but is mandatory and free for banks.
The proposal states that, unlike the TAG program, the extended coverage under Dodd-Frank would not apply to low-interest negotiable order of withdrawal accounts or Interest on Lawyers Trust Accounts.