By Dave Clarke
WASHINGTON, Oct 12 (Reuters) - U.S. banking regulators on Tuesday laid out rough plans for how the government would use its new authority to dismantle large, collapsing financial companies.
The so-called resolution authority is a main plank of the Dodd-Frank financial reform legislation enacted in July in response to the 2008-09 financial crisis, and is designed to avoid massive government bailouts, such as the one more than $80 billion bailout of insurer AIG, and destructive bankruptcies like that of Lehman Brothers.
'The proposed rule is the first step in giving market participants greater clarity and certainty about how certain key components of the resolution authority will be implemented,' said Federal Deposit Insurance Corp Chairman Sheila Bair. 'Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk.'
The FDIC has faced concerns that creditors would be treated so harshly under this new regime that they would flee a firm at the first sign of instability, essentially causing a run on the financial firm's assets.
The FDIC voted on Friday to formally propose the new rule, and announced the vote on Tuesday.
Under the law, the government would designate certain companies as systemically important to the financial system. The FDIC has the power to seize and break them up if they are heading toward collapse.
The rule seeks to clarify how certain creditors would be treated during a liquidation, a key area of concern for market participants; public comments can be submitted to the agency over the next 30 days.
The rule 'proposes to absolutely bar any additional payments to holders of long-term senior debt, subordinated debt, or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law,' according to the FDIC.'
The law allows the FDIC to move certain parts of a failing institution's business into a separate entity so that they can be sold at a later date.
Subordinated debt, long-term bondholders and shareholders would not get special protection under the new rules.
The FDIC said the rule seeks to make clear that all creditors would have to take losses during a liquidation and that any who receive an additional payment could be called on to repay any government funding they received to ensure taxpayers don't take a loss during a liquidation.
The FDIC had originally planned to propose the new rule in late September but held off to give other regulators more time to review the proposal.
Banks and financial firms have expressed concerns about whether short-term creditors will receive special treatment under the rule and the FDIC has sought to downplay this concern.
'Short-term borrowers will get extra protection,' a senior restructuring banker in New York, who was not authorized to speak on the record, said last week. 'That's designed to ensure that markets like the repo market can continue operating, because without extra protection, those markets could dry up quickly.'
The rule also seeks public comments over a 90 day period on a set of broader questions related to the new resolution authority.
(Reporting by Dave Clarke, Additional reporting by Dan Wilchins, Editing by Leslie Adler) (david.c.clarke@thomsonreuters.com; +1 202-898-8324; Reuters Messaging: david.c.clarke.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, Oct 12 (Reuters) - U.S. banking regulators on Tuesday laid out rough plans for how the government would use its new authority to dismantle large, collapsing financial companies.
The so-called resolution authority is a main plank of the Dodd-Frank financial reform legislation enacted in July in response to the 2008-09 financial crisis, and is designed to avoid massive government bailouts, such as the one more than $80 billion bailout of insurer AIG, and destructive bankruptcies like that of Lehman Brothers.
'The proposed rule is the first step in giving market participants greater clarity and certainty about how certain key components of the resolution authority will be implemented,' said Federal Deposit Insurance Corp Chairman Sheila Bair. 'Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk.'
The FDIC has faced concerns that creditors would be treated so harshly under this new regime that they would flee a firm at the first sign of instability, essentially causing a run on the financial firm's assets.
The FDIC voted on Friday to formally propose the new rule, and announced the vote on Tuesday.
Under the law, the government would designate certain companies as systemically important to the financial system. The FDIC has the power to seize and break them up if they are heading toward collapse.
The rule seeks to clarify how certain creditors would be treated during a liquidation, a key area of concern for market participants; public comments can be submitted to the agency over the next 30 days.
The rule 'proposes to absolutely bar any additional payments to holders of long-term senior debt, subordinated debt, or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law,' according to the FDIC.'
The law allows the FDIC to move certain parts of a failing institution's business into a separate entity so that they can be sold at a later date.
Subordinated debt, long-term bondholders and shareholders would not get special protection under the new rules.
The FDIC said the rule seeks to make clear that all creditors would have to take losses during a liquidation and that any who receive an additional payment could be called on to repay any government funding they received to ensure taxpayers don't take a loss during a liquidation.
The FDIC had originally planned to propose the new rule in late September but held off to give other regulators more time to review the proposal.
Banks and financial firms have expressed concerns about whether short-term creditors will receive special treatment under the rule and the FDIC has sought to downplay this concern.
'Short-term borrowers will get extra protection,' a senior restructuring banker in New York, who was not authorized to speak on the record, said last week. 'That's designed to ensure that markets like the repo market can continue operating, because without extra protection, those markets could dry up quickly.'
The rule also seeks public comments over a 90 day period on a set of broader questions related to the new resolution authority.
(Reporting by Dave Clarke, Additional reporting by Dan Wilchins, Editing by Leslie Adler) (david.c.clarke@thomsonreuters.com; +1 202-898-8324; Reuters Messaging: david.c.clarke.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.