WASHINGTON - Regulators plan to employ a strategy for handling big failing banks that would help stabilize the financial system by preserving the banks' healthy operations, the head of the Federal Deposit Insurance Corp. says.
FDIC acting Chairman Martin Gruenberg outlined the agency's strategy in a speech Thursday. Under the 2010 financial-overhaul law, the agency has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The aim is to avoid another taxpayer bailout of Wall Street banks in another financial crisis.
Gruenberg said that under the strategy, the FDIC would take over a failing bank's parent company but allow its healthy subsidiaries to continue operating. He said that would reduce disruption and permit normal financial transactions.
Because the subsidiaries would keep operating, their trading and other relationships with other big financial institutions also would continue normally and "mitigate systemic consequences," Gruenberg said in the speech at a Federal Reserve conference in Chicago. That would reduce the chance that closely connected big financial firms would fall like dominoes.
In shutting down a bank's parent company, the FDIC would transfer its assets, especially holdings in its subsidiaries, to a new "bridge" company. Shareholders would lose their investment. Its creditors would receive equity stakes in the "bridge" company.
Eventually, the bridge company would become a healthy company in private hands, Gruenberg said.
FDIC officials cite Lehman Brothers' collapse in 2008 that precipitated the financial meltdown and Great Recession. Despite Lehman's extensive losses, there were valuable assets in some subsidiaries, especially its European operation, based in London, they say. When Lehman failed, that operation had to be dissolved under British law. The FDIC strategy would permit such an operation to continue.
by Marcy Gordon - May. 10, 2012 06:21 PM Associated Press
FDIC to spare healthy units of failing banks
Showing posts with label dodd frank wall street reform. Show all posts
Showing posts with label dodd frank wall street reform. Show all posts
Sunday, May 13, 2012
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
JPMorgan Chase's (JPM) $2 billion trading loss has renewed concerns about how the nation's largest banks manage risk and raised doubt as to whether the 2010 financial overhaul adequately protects taxpayers.
Overnight, CEO Jamie Dimon seems to have gone from exhibit A in the case that too-big-to-fail banks can be safely run without tighter regulatory handcuffs to exhibit A that they can't.
In one respect, the shift may be unwarranted: The trading loss looks like a superficial wound — not even big enough to wipe out half ofJPMorgan's Q1 profit. At least when it comes to absorbing this particular loss, "too big" may not be so bad.
JPMorgan Chase CEO Jamie Dimon reassured the bank's employees on Friday that the company is "very strong." He is pictured in San Francisco on Jan. 13.
But banking experts understand that financial crises are a fact of life. As long as banks are playing with federally insured deposits — and an implicit broader bailout backstop — taxpayers have an interest in making sure they don't take on excessive risk.
That's where the Volcker Rule, passed as part of the Dodd-Frank reforms, is supposed to come in. But the rule remains unfinished as regulators struggle to translate Congress' mandate to keep banks from taking risky bets into clear, workable guidelines.
Rep. Barney Frank, D-Mass., sounded a note of vindication: "The argument that financial institutions do not need new rules .. . is at least $2 billion harder to make today."
Yet it's unclear if the Volcker Rule would even restrict the activity that burned JPMorgan. Dimon suggested on Thursday's conference call that the trade in question was done to hedge risk and, therefore, would be permissible under the Volcker Rule.
The rule targets proprietary trading — making trades not to provide customers with liquidity or hedge risk, but for pure profit.
"The Volcker Rule judges very much by the intent" behind a trade, said Brookings Institution scholar Douglas Elliott. "If a bank does its hedging incompetently," that's beyond the ability of regulators to police, he said.
And for good reason: "If we didn't have these exceptions, (the Volcker Rule) would effectively forbid a large majority of the things that banks do."
Elliott, for one, is no fan of the Volcker Rule, which aims to ban unnecessary risk, rather than preventing excessive risk-taking. In that sense, it seems designed to rid bank culture of a "trading mentality," he said.
Other analysts also see it as somewhat besides the point in heading off financial crises.
"Banks usually go broke from making bad loans," not proprietary trading, said American Enterprise Institute banking expert Alex Pollock.
by Jed Graham Investor's Business Daily May 11, 2012
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
Overnight, CEO Jamie Dimon seems to have gone from exhibit A in the case that too-big-to-fail banks can be safely run without tighter regulatory handcuffs to exhibit A that they can't.
In one respect, the shift may be unwarranted: The trading loss looks like a superficial wound — not even big enough to wipe out half ofJPMorgan's Q1 profit. At least when it comes to absorbing this particular loss, "too big" may not be so bad.
JPMorgan Chase CEO Jamie Dimon reassured the bank's employees on Friday that the company is "very strong." He is pictured in San Francisco on Jan. 13.
But banking experts understand that financial crises are a fact of life. As long as banks are playing with federally insured deposits — and an implicit broader bailout backstop — taxpayers have an interest in making sure they don't take on excessive risk.
That's where the Volcker Rule, passed as part of the Dodd-Frank reforms, is supposed to come in. But the rule remains unfinished as regulators struggle to translate Congress' mandate to keep banks from taking risky bets into clear, workable guidelines.
Rep. Barney Frank, D-Mass., sounded a note of vindication: "The argument that financial institutions do not need new rules .. . is at least $2 billion harder to make today."
Yet it's unclear if the Volcker Rule would even restrict the activity that burned JPMorgan. Dimon suggested on Thursday's conference call that the trade in question was done to hedge risk and, therefore, would be permissible under the Volcker Rule.
The rule targets proprietary trading — making trades not to provide customers with liquidity or hedge risk, but for pure profit.
"The Volcker Rule judges very much by the intent" behind a trade, said Brookings Institution scholar Douglas Elliott. "If a bank does its hedging incompetently," that's beyond the ability of regulators to police, he said.
And for good reason: "If we didn't have these exceptions, (the Volcker Rule) would effectively forbid a large majority of the things that banks do."
Elliott, for one, is no fan of the Volcker Rule, which aims to ban unnecessary risk, rather than preventing excessive risk-taking. In that sense, it seems designed to rid bank culture of a "trading mentality," he said.
Other analysts also see it as somewhat besides the point in heading off financial crises.
"Banks usually go broke from making bad loans," not proprietary trading, said American Enterprise Institute banking expert Alex Pollock.
by Jed Graham Investor's Business Daily May 11, 2012
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
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