Compliance Bulletin

Proposal Establishes Bank Holding Company Conservator
August 3, 2009

The Treasury Department released another portion of its regulatory restructuring program, this one seeking to establish a system where the FDIC or the SEC (in the case of registered brokers or dealers) may be designated to act as a conservator or receiver of a bank holding company that is in default or is in danger of default. The “Resolution Authority for Large, Interconnected Financial Companies Act of 2009” (the “Act”) authorizes the Federal Reserve Board, FDIC or SEC to make such a recommendation to the Treasury Department, describing the effect that the default would have on economic conditions or to financial stability in the U.S., and also recommending the kind of government assistance or actions that is warranted. The Treasury Secretary (in consultation with the President) could then appoint the FDIC or the SEC as conservator or receiver [1].

When appointed, the FDIC or SEC succeeds to the bank holding company’s rights and authorities, and may operate the firm; transfer its assets, rights, and liabilities to a bridge bank holding company (BBHC); merge the company with another company; or liquidate the company. The conservator/receiver may also provide assistance by making loans to the company, purchasing its assets, assuming or guaranteeing its obligations, acquiring its equity interests or securities, taking liens, and selling and disposing of the assets, liabilities, obligations, equity interests or securities of the holding company or its subsidiaries.

Once the appointment of the conservator/receiver is made, any ongoing bankruptcy proceeding is terminated and, for the duration of the appointment, no bankruptcy may be filed. The decision to appoint a conservator or receiver is subject to judicial review. The Act includes a provision stating that the directors of a holding company are not liable for agreeing to the appointment. The rights that shareholders and creditors of the bank holding company may have against the assets of the company are terminated except for their right to payment, resolution, or other satisfaction of their claims.

Much of the Act details the limits and scope of the FDIC’s and SEC’s new authorities, which include the handling of claims, the discretion to disaffirm contracts, and authority to establish BBHCs to further the agencies’ duties under the Act. Among other things, the BBHC is required to maintain only as much capital or surplus, if any, as the FDIC or SEC determines to be appropriate. Also, the BBHC’s franchise, property, and income are exempt from federal, state or local taxation.

The status of a BBHC as such terminates upon its merger or consolidation with another company, the sale of most of its capital stock to another company, or the assumption of most of its liabilities or acquisition of most of its assets by another company. Also, the BBHC could be dissolved. One of these termination events must occur within two years after the BBHC is granted its charter, unless extended by the FDIC or SEC for up to three additional one-year periods.

The Act authorizes the establishment of the Bank Holding Company Fund, which will be capitalized through borrowings from the Department of Treasury, which in turn may issue public debt. The fund is established when a default of a company is declared. The FDIC is obligated, within 5 years after a failure, to seek to recover funds expended to resolve a company. The funds are to be recovered through “one or more” risk-based assessments on bank holding companies whose non-FDIC assessed liabilities on a consolidated basis are greater than $10 billion. For example, if the consolidated entity has balance sheet liabilities of $100 billion and its FDIC-insured deposit base is $70 million, its risk-based assessment to the Bank Holding Company Fund is based on $20 billion ($100 billion – [$10 billion + $70 billion]).

Risk-based assessments will take into account the entity’s type and concentration of assets and liabilities, leverage, size, complexity, risk profile, interconnectedness to the financial system, threat posed to the stability of the financial system, and other considerations. Deductions are allowed for amounts paid to any state insurance guarantee fund association on account of the conservation, rehabilitation, or liquidation of the company or a subsidiary.

Preliminarily, one of the industry’s major concerns over the proposal is the deployment of the FDIC as the primary resolution authority. In the public’s eye, for decades the FDIC has been viewed as the guarantor of bank deposits. We must ensure that public confidence in deposit insurance is not eroded as the FDIC’s mission is extended to resolve a myriad of other companies. We must protect and segregate the Bank Insurance Fund against any uses or losses associated with the FDIC’s new proposed responsibilities. And we must ensure that the FDIC has sufficient resources to perform these functions in a manner that does not compromise its traditional responsibilities.

  1. The Treasury Department’s decision is subject to review by the Comptroller General of the United States [but the timing is unclear]. A bank holding company will be considered to be in default or in danger of default if it has filed (or imminently will file) for bankruptcy; it is critically undercapitalized; it has or will incur losses that will deplete its capital; its assets are (or are likely to be) less than its obligations; or it is (or is likely to be) unable to pay its obligations in the normal course of business.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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