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The US Federal Deposit and Insurance Corporation (FDIC) may have fired the first salvo for so-called bank bail-ins last week, but Moodyâ??s is not buying.
The FDIC notice of proposed rule making (NPR) on â??Orderly Liquidation.â?? It includes the idea of creating a â??bridge bankâ?? that would continue the basic operations of failed financials, but â??not be saddled with the shareholders, debt, senior executives or bad assets and operations that contributed to the failure of the covered financial company.â? Shareholders and debt holders would cease to receive payments once the bridging entityâ??s created â?? and presto youâ??ve got a bank bail-in, instead of bail-out.
The FDIC does distinguish between different types of creditors. Short-term creditors â?? those providing financing or liquidity â?? might still get pay-outs if the Corporation deems them necessary to reduce systemic risk. Crucially though, the FDIC still has the power to claw back such payments at a later, less systemically-risky date.
Anyway, over to Moodyâ??s â?? from its latest weekly credit outlook:
We believe that, as outlined in the NPR, the regime would likely not work as planned. Thus, the NPR does not change our view.
Woah, woah, woah. This is heady stuff from a ratings agency.
Our assessment on how the NPR could impact our support assumptions on systemically important US banks is based on whether the resolution regime would enable US regulators to avoid supporting such entities. We believe there are two key issues: (1) whether the NPR provides a viable structure for the bridge entity that successfully meets the stated policy objectives, and (2) whether an internationally active institution subject to multiple regulatory and legal regimes can be wound down within the structure laid out by the NPR.
The bridge entity is really the thing to focus on here. A workable bridging scheme would be, in Moodyâ??s parlance, â??credit negativeâ? for big banks that currently benefit from ratings uplift tied to â??expectations of government support.â? Thatâ??s a nice way of saying they get their ratings boosted a few notches because everyone (still) expects that theyâ??re Too Big To Fail (TBTF) â?? the government will bail them out.
The FDIC proposal was meant to mitigate that idea and provide a decent framework for dealing with collapsed TBTF financials, winding them down in that orderly way and so on. If Moodyâ??s isnâ??t buying the plan, it may be a â??credit positiveâ? in terms of the banksâ?? ratings, but it does suggest the FDIC has failed to solve a systemic problem.
Back to the rating agency:
However, we believe that, as outlined in the NPR, the regime would likely not work as planned. We think that short-term creditors would not consider themselves sufficiently protected to continue to fund the bridge entity given the significant amount of uncertainty associated with the FDIC board approval requirement and claw back conditions. This, in turn, would result in a run of short-term creditors, clients, and counterparties, and significantly reduce the value, and perhaps the viability, of the entity. Most importantly, we believe that the complexity and visibility of such a resolution would not contain the risk of contagion to other banks with exposure to the bridge entity, which would ultimately force the hand of governments to provide support.
And thatâ??s not even mentioning other operational difficulties in the FDIC proposal â?? the kind of things already highlighted by New York Federal Reserve Bank president, Bill Dudley. Perhaps European regulators will have some different ideas.
Related links: Doubts on US bank resolution plan - FT Flipping the capital structure "â?? FT Alphaville
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