FDIC Releases Plans If Wall Street Bank Collapses

The Federal Deposit Insurance Corporation (FDIC) has issued plans to prepare itself and other regulators to handle the failure of any significant Wall Street bank.

The Title II of the Dodd-Frank Wall Street Reform and Consumer Act report has laid out a blueprint for how regulators should deal with a Wall Street bank failure and seek to minimize costs.

Since the crash of Silicon Valley Bank in March 2023, US regulators have faced increased pressure to bolster their preparedness for the collapse of a ‘global systemically important bank’ (GSIB).

The report plans for three stages of resolution: launching the resolution, stabilizing the failed firm’s operations and exiting the resolution.

In a speech, FDIC Chairman Martin Gruenberg said when a GSIB approaches failure, the FDIC and other authorities will decide whether and how the Title II framework would be used.

Part of the decision-making process will include a determination that using the framework would mitigate the adverse effects of the firm’s failure and resolution in bankruptcy.

To stabilize the failed firm’s operations, it will be taken over by a company, known as the Bridge Financial Company, which is in a strong position to use its internal resources to maintain continuity of operations, provide liquidity support and recapitalize material domestic and foreign subsidiaries.

Once the firm’s subsidiaries are stabilized, the FDIC and Bridge Financial Company will be expected to develop and implement a restructuring and wind-down plan. This plan will depend on the nature of its business, the causes of failure as well as the economic and market conditions at the time.

This plan aims to ensure that the failure of a GSIB does not present a systemic threat to the US financial system, according to Gruenberg.

He added:  “Let me conclude by acknowledging that a US GSIB failure will be extraordinarily challenging under any circumstances. Needless to say, we have yet to execute an orderly resolution of a US GSIB. Until we do so successfully, there will be questions as to whether it can be done.”