“When the parent files, its regulated subsidiaries are likely to be seized
by domestic and foreign regulators,” Vris said of SIFIs. “Depositors
may demand their deposits, and short-term financing throughout the
corporate family ceases to roll over, both increasing the need for liquidity
and eliminating ready access to it.”
said, noting that it’s any court’s job to find “the balance
between due process, which takes time, and the real economic
need.” The hearing at which Sontchi was testifying pertained
to Chapter 11 broadly, but focused specifically on how the
Code and Dodd-Frank functioned when it came to resolving
SIFIs, a process wherein “the debtor is a parent holding company whose chief assets are equity in regulated banks and broker dealers with operations both here and, in the case of global SIFIs, internationally,” in the words of fellow witness Jane
Lee Vris of the National Bankruptcy Conference (NBC).
Chapter 11 is complex and slow enough when it’s used by a
company, large or small, but when the biggest assets of the
company hoping to reorganize are essentially regulated by
banks, its filing triggers a whole host of new issues that complicate the proceedings by orders of magnitude.
Fed Objects to Capital Plans of
Five Bank Holding Companies
The Federal Reserve conducted its fourth Comprehensive
Capital Analysis and Review (CCAR) program at the end of
March. The review includes both qualitative factors, such as
whether a holding company’s capital planning process is strong
enough, and quantitative factors, such as whether or not the
company maintains enough capital in reserve to withstand
hypothetical periods economic and financial market stress.
This year’s review found the Fed approving the capital plans of
25 bank holding companies, but objecting to the remaining
five, put forth by some of the banking industry’s biggest
names. Citigroup Inc., HSBC North American Holdings Inc.,
RBS Citizens Financial Group, Inc. and Santander Holdings
USA were all recipients of Fed objections on the basis of
qualitative weaknesses, while Zions Bancorporation received
an objection because it did not meet a minimum post-stress
tier-1 capital requirement.
The most notable of these objections belongs to Citigroup,
which is held to “significantly heightened supervisory
expectations” because it counts itself among the nation’s
largest and most complex bank holding companies, according
to the Fed. Specifically the qualitative deficiencies relate to
how Citigroup and its fellow underachievers project for
revenues and losses in a crisis, as well as how functional their
internal processes around controlling these projections are.
Any holding company receiving an objection must resubmit
its plan. Until then, it also cannot make any capital distributions
without prior written approval from the Fed.
Source: NACM
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“When the parent files, its regulated subsidiaries are likely to
be seized by domestic and foreign regulators,” Vris said of
SIFIs. “Depositors may demand their deposits, and shortterm financing throughout the corporate family ceases to roll
over, both increasing the need for liquidity and eliminating
ready access to it,” she added. “Remaining assets are sold,
some rapidly.” If time is of the essence in a typical Chapter 11
case, it’s even more so when it comes to winding down a company whose assets are financial institutions with enormous
portfolios. Each tick of the clock could cost billions of dollars
and could pose a serious threat to the continued health of the
US financial market.
With this systemic risk in mind, Dodd-Frank was drafted
with provisions that set out the means by which SIFIs could
resolve themselves without overturning the economy. However, there are two key places, according to bankruptcy expert
Thomas Jackson, of the William E. Simon School for Business
at the University of Rochester, where Dodd-Frank still envisions the existing Chapter 11 structure as the preferred mechanism by which SIFIs are resolved. Under Title I of the bill,
certain institutions must not merely only plan to file a prepackaged bankruptcy, but essentially must have a plan “for
rapid and orderly resolution in the event of material financial
distress or failure” prepared already, and have it reviewed by
the Federal Reserve Board, the Financial Stability Oversight
Council and the Federal Deposit Insurance Corporation
(FDIC). Failure to submit a plan can lead to restrictions and
even divestiture, but each submitted plan must be credible
and capable of facilitating “an orderly resolution of the company under Title 11 of the US Code,” which is to say Chapter
11 of the Bankruptcy Code.
“The important point is that effective resolution plans are
tested against bankruptcy law,” Jackson observed. “It therefore
goes without saying—but is worth saying nonetheless—that
the effectiveness of bankruptcy law in being able to resolve
SIFIs is critically important to