Banks 'Too Big to Fail,' Bank Shareholders Not

NEW YORK (TheStreet) -- Shareholders of failing financial holding companies will take it on the chin -- but healthy subsidiary businesses will have a better chance of surviving -- under the Federal Deposit Insurance Corp.'s new resolution authority.

Acting FDIC Chairman Martin Gruenberg says the agency is ready to move beyond its traditional role of resolving failing federally insured banks and thrifts, with staff and processes in place to resolve large failing financial holding companies.

The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the FDIC's traditional role, to allow the resolution of entire financial holding companies, rather than just subsidiary banks and thrifts, and Gruenberg said at the Federal Reserve Bank of Chicago Bank Structure Conference on Thursday that the agency's new Office of Complex Financial institutions was ready to "monitor risk within and across these large, complex financial firms from the standpoint of resolution," conduct resolution planning for "potential crisis situations," and "coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution."

The largest failed U.S. bank or thrift was Washington Mutual FA, which was shuttered by the Office of Thrift Supervision in September 2008. The failed thrift was the main subsidiary of Washington Mutual, Inc., which continued to exist after the FDIC was appointed receiver and sold Washington Mutual FA to JPMorgan Chase (JPM) for $1.9 billion, at no cost the deposit insurance fund.

In the long aftermath of Washington Mutual FA's failure, the surviving Washington Mutual, Inc., and its shareholders have fought several court battles, to prevent the approval of the holding company's bankruptcy plan, arguing that the thrift subsidiary should never have been shut down.

The FDIC's new authority to revolve entire holding companies aims to prevent that sort of messy aftermath.

Under its new authority, the FDIC will require much-maligned "living wills" for bank holding companies with total assets of over $50 billion, along with "certain nonbank financial companies," to help the agency manage orderly liquidations in the event of failure.

Subsidiary banks and thrifts with total assets of more than $50 billion will also be required to submit "living wills," and Gruenberg said "these two resolution plan rulemakings are designed to work in tandem and complement each other by covering the full range of business lines, legal entities and capital-structure combinations within a large financial firm." The FDIC acting chairman added that his agency and "the Federal Reserve have started the process of engaging with individual companies on the preparation of their resolution plans. The first plans, for companies with assets over $250 billion, are due in July."

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