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How to pronounce bank failure in English?

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my name is still Aaron Klein I'm still a
fellow on economic studies and policy
director on the center for regulation of
markets and it is still a rainy
Wednesday afternoon and you all are
still in the room so thank you for
choosing to spend your time with us
discussing or I think is a very
important issue precisely because it is
not a topical issue which is what to do
and whether we are prepared to and have
incorporated the lessons from the prior
recession on what to do should a
domestic but still large not giant not
one of these globally systemically
important financial institutions but a
large and important domestic institution
run into trouble you know I want to talk
about it now and I'm so thrilled that
we're joined by and to receive the
wisdom from many of our speakers now
when everything looks fine and I'm gonna
start by asking everybody here it kind
of introduced the topic a question which
was what was the first year in American
history in which not a single bank
failed the answer to that question may
surprise you it was not until 2005 that
America experienced a calendar year
without a single bank failure in fact
from the period of 2004 to 2007 for 32
months not a single Bank failed it was
the longest period like that in American
history featuring not one but two years
without a single bank failure at the
time I can recall many bank regulators
talking about what a successful job we'd
been and how wonderful the banking
system in the United States was as
evidenced by no bank failures I think
all of us in the room can appreciate the
2005 and 2006 were not the apex of
safety and stability in the US financial
system it remained that way in fact 2000
after the great crisis between 2013 and
2017 a small but a decent number of
banks failed every year I defined this
as less than 25 2018 however marked only
the third year in American history were
not a single financial institution
failed
and there was has been one failure so
far in 2019 of a bank I won't get into
its exact root causes of failure but it
was just one and it seemed like it was
tremendous amounts of fraud and so it is
I think precisely during the period in
which all institutions are seemingly
doing well together that it's important
to consider are we prepared for a
scenario in which many institutions
particularly some that are sizeable or
not and I can think of no better person
to lead us in that conversation than
Martin Gruenberg Marty has been at the
FDIC board serving as chairman vice
chairman currently a member the board
for 14 years now prior to that marty was
involved in every major piece of
financial services legislation that
occurred for a generation going back to
and through the cleanup of the last set
great wave of bank failures and the
savings and loan crisis that spawned the
reforms of fiducia and firey a--which
altum Utley reshaped the agency upon
which now he serves prior to that
Marty's distinguished experience
in the United States Senate in the
Congress he's a graduate of Case Western
and a fellow Princetonian and Marty's
career and his public service both in
Washington and through the FDIC
fundamentally globally where he's headed
and served on multiple agencies to help
spread the importance and value of
deposit insurance and financial services
resolution capability and authority and
a global context really embodies the
Princeton motto of service of this
nation in the service of all nations so
join me in welcoming Marty both to
Brookings and thanking Marty for its
fantastic work so far at the FDIC as we
hear from him what we ought to be
thinking about about the potential
problems in the resolution of a large
domestic financial institution Thank You
Marty
I should quit while I'm ahead I think is
and thank you for that very generous
introduction and there is a certain
symmetry I have to confess
if not they Javu because I you know I
did join the board of the FDIC in August
of 2005 and the FDIC had at that time
gone through the longest period in its
history with a bank failure without a
bank failure and when I was seeking the
nomination to the board back then this
is true somebody asked her well why do
you want to go to the FDIC you know
nothing's happening in the banking
industry you'll be bored over there you
won't have anything to do and I said at
the time you know I don't really need a
financial crisis to be interested in
banking regulation and all things being
equal I would just as soon not have a
crisis occur if I have the privilege of
serving on the board of the FDIC that
was August of 2005 and then 2006 we
really had the first Inklings of
problems in the mortgage market 2007 we
had a full-scale meltdown of the
mortgage market in the United States
2008 we were in the midst of a near
catastrophic collapse of our financial
system followed by the most severe
recession since World War two and I must
say there is a certain sense of deja vu
when Aaron referenced and we you know we
did not have a bank failure in the
United States in 2018 in fact it went
through an 18-month period without a
bank failure until a small institution
in Texas failed earlier this year
so you know you would think the lack of
bank failures would be a reassuring sign
I must say for me it's it's as much of a
red flag as anything else particularly
at this late stage of an economic
recovery with the buildup of underlying
risks in the financial sector and the
possibility of a downturn you know what
some at some point I couldn't resist
that referencing that with air with
Aaron's introduction but certainly the
subject I want to talk about today is
relevant to all of that so let me begin
by thanking Aaron and the Brookings
Center on regulation and markets for
inviting me here today the subject I'd
like to discuss the resolution of large
regional banks in the United States as
Aaron pointed out has received
relatively little attention during the
ten years since the financial crisis of
2008-2009 most of the attention
appropriately has been on the challenges
posed by the resolution of global
systemically important banks the
so-called g-sibs however regional banks
which for the purposes of today's
discussion
I'll categorizes banks with assets
between 50 and 500 billion dollars pose
very significant resolution challenges
to the FDIC that are quite distinct from
those posed by the so-called g-sibs
and quite distinct from the smaller
community banks their size complexity
reliance on market funding and uninsured
deposits would present very substantial
risks in resolution with potential
systemic on
so I view today's program as an
opportunity to have a public discussion
about the risks and challenges presented
by the resolution of large regional
banks now in order to establish a common
baseline of understanding for our
discussion I'll begin with a brief
description of the FDIC's resolution
process under the Federal Deposit
Insurance Act just to set the framework
I'll then discuss the distinct and
underappreciated challenges posed by the
resolution of regional banks and finally
I'll conclude with an overview of the
actions taken by the FDIC today to to
address these challenges so let me let
me begin just with the nuts and bolts of
the FDIC's resolution process under the
Federal Deposit Insurance Act now under
the FDI Act the FDIC has the exclusive
authority to act as the receiver or the
liquidating agent for failed federally
insured depository institutions now as
the FDIC's Resolution handbook describes
when a bank fails the chartering
Authority typically revokes the bank's
Charter and appoints the FDIC as
receiver they basically hand the failed
institution over over to us the
chartering Authority is the office of
the controller of the currency the OCC
for nationally chartered banks and the
state banking regulator for the state
chartered institutions now prior to
failure the chartering Authority
notifies the FDIC to that bank is in
trouble
there's of course a supervisory process
that may already be underway to avert
the failure of the institution but for
the purpose of the discussion today
we're going to assume
that the bank will fail since the
passage of the Federal Deposit Insurance
Corporation Improvement Act of 1991 for
those of you in this business that's
fiducia the FDIC has been required to
choose the resolution method as a matter
of law that's least costly to the FDIC's
Deposit Insurance Fund this is a
so-called
least caused test now as a general
matter the FDIC has two options for the
resolution of a failed bank first
the FDIC can sell some are most of the
assets of the failed institution to a
healthy acquiring bank which would
generally assume all the deposits or
only the insured deposits of the failed
bank along with some or most of the
remaining liabilities this is generally
called and I'd like you to remember this
term a purchase and assumption
transaction it it'll figure into the
later discussion PNA purchase an
assumption those assets and liabilities
not included in the transaction remain
behind in the receivership administered
by the FDIC now a second term I want you
to remember a special type of purchase
and assumption transaction that is used
when additional time is needed to market
a failed Bank is a bridge Bank
purchasing assumption in bridge bank
although a bridge bank is not commonly
used it has particular application to
the resolution of a large regional bank
so I'm going to come back to that as
well
a bridge bank is a bank chartered by the
OCC and temporarily owned and operated
by the FDIC to quote to bridge the time
between the date of failure of the
institution and the date of sale to
another acquiring bank
a bridge bank is established only if it
is projected to be the least costly
resolution alternative for the Deposit
Insurance Fund and before establishing a
bridge Bank a cost analysis has to show
that the franchise value of the bank of
the failed Bank is greater than the
marginal cost of operating the bridge
institution that's being less costly
than a payout of insured deposits and
this is where it becomes relevant
particularly to the regional institution
a bridge bank may be utilized when a
troubled bank fails suddenly generally
because of liquidity issues preventing
timely marketing in the institution when
the failed bank is too complex for
potential bidders to conduct due
diligence in the normal time frame to
submit a bit that accurately captures
the franchise value of the failed
institution or both these are the
reasons the bridge bank option has
particular applicability to large
regional banks and I'll come back to
these points on complexity and liquidity
if the FDIC does not receive any
acceptable bids for a purchase and
assumption transaction or the bridge
bank is not the least costly option then
the FDIC will execute what's called an
insured deposit payout which is the
second option available to us in
resolution in an insured deposit payout
the insured deposits are paid in full
and all assets and the remaining
liabilities of the failed bank go into
an FDIC receivership for liquidation so
since 2007 the onset of the financial
crisis the FDIC is served as receiver
for over 525 banks
only nine of these failed banks had
assets over ten billion nine of the five
twenty five the overwhelming majority
over 98 percent had assets under ten
billion it tells you which banks have
failed during this crisis in post crisis
period approximately 95% of resolutions
conducted by the FDIC since 2007 involve
purchase and assumption transactions
generally involving a single acquirer
assuming near assuming nearly all of the
failing banks liabilities this
resolution approach particularly
applicable to community banks is
generally the least disruptive both to
the depositors in the local community
and the easiest for the FDIC to execute
only 25 banks since 2007 were resolved
through insured deposit payouts
reflecting the general availability of
acquirers for purchase and assumption
transactions for these smaller
institutions which were the overwhelming
majority of banks that failed during and
after the crisis in only three
resolutions since 2007 was a bridge bank
utilized and only one of those three
cases involved an institution with
assets over ten billion dollars and this
really leads into the discussion of the
challenges posed by the failure of a
large regional bank and while and why it
is really quite distinctive from the
community bank resolutions which were
really the overwhelming number of
resolutions done by the FDIC in this
post crisis period so let's talk about
regional large bank resolution
as at the second quarter of this year
there were 39 banks in the United States
with total assets between 50 and 500
billion dollars collectively those banks
hold about 6 trillion dollars in assets
or nearly 33% of banking industry assets
so they are a big portion of the banking
industry in the United States they hold
four point three trillion dollars of
deposits or about 31 percent of total
deposits and those deposit those
deposits are held in 189 million deposit
accounts now of those deposits 1.8
trillion approximately 43% are uninsured
that's based on both the average and the
median but the average and the median
are right around 43% these uninsured
deposits typically would include
business payroll accounts deposits from
large not-for-profit institutions and
individuals with large balances such as
retirees the size of these institutions
by definition limits the universe of
banks with the capability to acquire
them if they fail I mean this is pretty
self-evident the criteria used by the
FDIC to select potential bidders include
asset size capital level regulatory
ratings geographic location and minority
owned status even a 50 billion dollar
bank would be a substantial acquisition
for a very large bank to absorb
at the top of this scale at 500 billion
likely only a global systemically
important banks would have the capacity
to make such an acquisition so we are
talking about a limited universe of
potential acquirers and and remember the
purchase and assumption traditional
purchase assumption transactions which
are 95% of the crisis and post crisis
resolution are dependent on an available
acquirer given the limited number of
banks with the capability to acquire a
failed regional bank through a
traditional purchase and assumption
transaction there is a significant
possibility if not probability that the
FDIC would have to establish a bridge
bank to manage the orderly failure of
such an institution in managing a failed
regional bank through a bridge bank is a
very different ballgame that when you
have an acquire and would pose a number
of challenges to the FDIC some of these
challenges would also apply in the PNA
purchase an assumption transaction but
certainly apply in to a bridge bank
first and let me just walk through these
even though regional banks generally
don't have the extensive international
operations and diversified non-bank
business lines that characterized the
global institutions the g-sibs
many of these regional banks
nevertheless have large branch networks
substantial IT systems and millions of
account holders this complexity
certainly as compared to the smaller
community banks would make the
management of a bridge bank a very
significant operational challenge for
the FDIC if somebody who sat on the
board
I'm going to come back to this during
the crisis take my word for it
second regional banks rely to a greater
extent on credit sensitive market
funding and smaller banks they are thus
more susceptible to a rapid failure
caused by a lack of liquidity greatly
complicating an orderly resolution third
the sheer volume of accounts held by
these institutions would pose a large
challenge to the FDIC to make a rapid
determination over the famous weekend
after failure of the institution as to
which accounts were insured and which
accounts were not and believe me that
matters as of the second quarter of 2019
these regional banks had an average of
four point eight million deposit
accounts with twenty seven point four
million deposit accounts at the
institution at the top of this range a
rapid determination and payment of
insured accounts is essential for an
orderly resolution fourth
unlike the global institutions which are
required to maintain among a minimum
amount of long-term unsecured debts to
absorb losses in the event of failure
regional banks are not subject to such a
requirement as a result there is
significant variability in the holdings
of unsecured debt by regional banks on
average these banks hold three point
nine billion in long-term unsecured debt
which is about two point five percent of
total assets well five of these banks
hold long term unsecured debt of four
point five percent or more of total
assets eight report no
long-term unsecured debt so depending on
the institution a buffer of unsecured
debt to absorb losses and resolution
might or might not be available
and finally the heavy reliance of these
institutions on uninsured deposits would
pose a very significant resolution
challenge as I mentioned the most recent
call report data indicate that on
average about 43% of the deposits at
regional banks with assets between 5 and
50 and 500 billion are uninsured
although the FDIC's resolution
experience indicates that call report
call report data generally overstate the
volume of uninsured deposits to some
degree it is nonetheless clear that
regional banks have a heavy reliance on
uninsured deposits for funding in a
resolution where there is no acquiring
institution and possibly little or no
unsecured debt to absorb losses it is
likely that the least cost test would
require that uninsured depositors take
losses given the heavy reliance of
regional banks on and insured deposits
uninsured depositors taking losses at a
failed regional bank could have not gone
consequences for other regional banks
particularly in a stressed economic
environment so we have two examples from
the financial crisis that illustrate
pretty clearly the risks I've just
talked about one is Washington Mutual
Bank and the other is IndyMac Bank and
let me walk through those two examples
because they they pretty well illustrate
what I've been talking about
now Washington Mutual which over with
over three hundred billion dollars in
assets at the time of its failure in
September 2008 was the largest thrift
institution in the United States at the
time and the sixth largest insured
depository institution its failure was
the largest in the history of the FDIC
several factors made it possible for
Washington Mutual to fail with no loss
to the Deposit Insurance Fund and no
loss imposed on its forty five billion
dollars of uninsured deposits which was
approximately twenty four percent of its
total deposits at the time
first there was an acquirer for
Washington Mutual with the capacity to
assume all the assets and all of the
deposits both insured and uninsured of
the failed institution through a
traditional purchase and assumption
transaction second not only did the
acquirer have the capacity to undertake
the transaction but because it had
attempted to acquire Washington Mutual
on an open institution basis meaning
before it failed
prior to the failure the acquire had
already done the due diligence necessary
to enable it to and to act quickly when
Washington Mutual finally fell this is
really a critical point and third
Washington Mutual had a substantial
volume of unsecured debt thirteen point
eight billion dollars of unsecured debt
four point five percent of its total
assets which was available to absorb
losses in
resolution I gotta tell you the word
luck does come to mind here because
there was nothing nothing inevitable
about this this loss of loss-absorbing
capacity was a central to meeting the
least-cost test and for uninsured
depositors to avoid taking a loss if
these factors had not been in place at
the time of Washington Mutual failure
the FDIC likely would have had to
establish the bridge Bank and take over
the operation of the failed institution
the failure of Washington Mutual in that
scenario would have wiped out the
deposit insurance fund and uninsured
depositors would likely have had to take
a loss in order to meet the least-cost
test given the stressed economic and
financial environment in September of
2008 those of you who are we met around
remember September of 2008 when
Washington Mutual failed imposing a loss
on forty five billion dollars of
uninsured deposits at that moment could
have had a significantly destabilizing
effect the only way to avoid that
outcome would have been for the FDIC to
exercise the systemic risk exception
available under the Federal Deposit
Insurance Act in order to set aside the
least cost test that needless to say
would have been a very difficult
judgment to make and illustrates the
potential systemic risk associated with
the failure of a large regional
institution now the risks of a regional
bank resolution are illustrated further
by the failure that occurred in July of
2008 of IndyMac
which was a thirty billion dollar thrift
so Indy back was thirty billion
Washington Mutual was three hundred
billion when IndyMac failed
there was no viable acquire and Emax
franchise value was pretty much zero and
it had no unsecured debt
the FDIC had to establish a bridge Bank
impose a loss on 2.6 billion dollars of
uninsured deposits which was about
fourteen percent of the total deposits
of IndyMac at the time and then managed
the failed institution over a nine-month
period during which the failed
institution was partially wound down and
eventually sold the lack of public
familiarity with the failure of an
institution of even this size was enough
to cause a local reaction and lines
around the institution on the Monday
after failure IndyMac turned out to be
the most costly failure in the history
of the FDIC resulting in a twelve point
four billion dollar loss to the Deposit
Insurance Fund so look the lesson here
is is pretty clear a 300 billion dollar
bank could fail without cost to the
Deposit Insurance Fund and no losses to
uninsured depositors so long as there
was a viable of acquire who could
undertake and all deposit purchase and
assumption transaction and unsecured
debt available to absorb losses however
a thirty billion dollar institution
which had no unsecured debt and for
which there was no viable acquire
resulted in the largest
lost to the deposit insurance fund in
the FDIC's history losses to uninsured
depositors and frankly some reaction in
the local community so anyone who thinks
that the failure of a regional bank is
like a failure of a community bank is
not paying attention we have we have
real-world experience that was very
tough and and frankly an enlightening
now since the financial crisis the FDIC
has undertaken a number of initiatives
to enhance its ability to manage the
orderly failure of a regional bank
including through a bridge bank if
necessary which is a probable if not a
lot if possible if not likely scenario
for one of these institutions since 2011
the FDIC has by rule required banks with
assets over fifty billion dollars to
prepare resolution plans for the insured
depository institution for the bank as a
complement to the holding company
resolution plan that's required under
title 1 of the dodd-frank act and these
IDI plans are really quite important
particularly in the case of the regional
banks the preamble to the 2011 rule
stated the purpose of this requirement
the rule requires a limited number of
the largest insured depository
institutions to provide the FDIC with
essential information concerning their
structure operations business practices
financial responsibilities and risk
exposures the rule requires these
institutions to develop and submit
detailed plans demonstrating how such
insured depository institutions could be
resolved in an orderly and timely manner
in the event of receivership so first
resolution plans for the ID is second in
2014 the federal banking agencies
adopted a rule implementing a
quantitative liquidity coverage ratio a
company subject to the rule was required
to maintain an amount of high-quality
liquid assets that is no less than a
hundred percent of its total that cash
out flows over a perspective 30-day 30
day calendar period this rule applies to
bank holding companies and insured
depository institutions with two hundred
fifty billion dollars or more in total
assets the Federal Reserve also adopted
a modified liquidity coverage ratio
standard based on a 21 calendar day
stress scenario that applied to bank
holding companies with total
consolidated assets between a hundred
and two hundred fifty billion this rule
like the resolution plan rule was based
on the experience from the financial
crisis that the liquidity failure of a
large banking organization can occur
fast very quickly high-quality liquid
assets sufficient to provide a 30-day
runway before failure for institutions
with assets over 250 billion and a 21
day runway for institutions with assets
between 100 and 250 billion were
important requirements from the FDIC's
perspective given the risks associated
with the failure of institutions of that
size and the value of the FDIC to having
an assured minimum time of preparation
before the failure such institutions
when they talk about a runway of 30 or
21 days where do you think that runway
leads to it leads to the FDIC so from
the FDIC standpoint having at least a
little bit of breathing room before one
of these institutions comes down is
pretty important now finally in November
of 2016 the FDIC adopted a rule
requiring institutions with over 2
million deposit accounts to improve the
quality of their deposit data and make
changes to their information systems so
that the FDIC could make a rapid and
accurate Deposit Insurance determination
to facilitate the prompt payment of FDIC
insured deposits when large depository
institutions fail this is job one for
the FDIC making good on insured deposits
as the preamble to that rule pointed out
and I quote prompt payment and deposit
insurance maintains public confidence in
the FDIC the banking system and overall
financial stability the rule applies to
23 of the 39 institutions between with
assets between 50 and 500 billion and I
want to read this other quote to you the
plant the preamble to that 2016 rule
stated the broad policy concern that led
to its adoption consistent with the
resolution plan and liquidity coverage
ratio rule makings and this is the quote
while the likelihood of any particular
covered institutions failure may be low
at a given point in time
history suggests that the financial
condition of institutions that are
perceived to be in good health can
deteriorate quickly and with little
notice in 2008 and 2009 several large
insured depository institutions failed
including IndyMac Bank in Washington
Mutual Bank you can see the impact those
experiences head-on the FDIC in general
very large idea is insured depository
institutions rely on credits that
sensitive funding more than smaller
ideas do which makes them more likely to
suffer a rapid acquittee failure that
was from the preamble
to the 2016 rule in addition to these
rule makings the FDIC has been focused
internally on planning for the
resolution of a large regional bank
because of the risks I've just talked
about now if I may say based on the work
done an area where additional rulemaking
might be prudent to facilitate the
orderly failure of a large regional bank
would be an unsecured debt requirement
to assure a comparable measure of
loss-absorbing resources in resolution
for these institutions as I indicated
there is wide variability in regard to
this among the the regional banks now
unfortunately instead of further
measures to strengthen the FDIC's
capabilities there have recently been a
number of measures finalized or proposed
that would weaken or remove the
requirements of these rule makings and
for the record I thought I should state
them in July of this year the FDIC
approved a final rule to allow banks
with two million or more deposits to
delay from 2020 to 2021 their compliance
with the requirement to improve their
data and reconfigure their systems to
support the FDIC's ability to make rapid
deposit insurance determinations in the
event of failure this additional year
extended the original three-year
compliance period in the 2016 rule which
took effect in April of 17 the final
rule also weakened the compliance
requirements that have been established
to assure the effective implementation
of the rule in April of this year the
FDIC issued an advanced notice of
proposed rulemaking that while
identifying the risks associated with
large bank failure nevertheless seeks
comment on a number of proposals that
would weaken the current resolution
planner
for insured depository institutions for
example alternatives put forward for
comment in this advanced notice of
proposed rulemaking would reduce the
resolution plan content requirements for
these largest insured depositories
reduce the frequency of resolution plan
submissions and eliminate the IDI plan
altogether for the smaller insured
depository institutions about fifty
billion dollars in essence now just
yesterday the FDIC Board voted on two
final rules the board adopted a joint
final rule with the Federal Reserve that
would eliminate the dodd-frank act title
one resolution plan requirements at the
holding company level with one exception
for institutions with assets between a
hundred and two hundred fifty billion
dollars and it would require the
submission of such plans for
institutions with assets between 250 and
500 billion just once every three years
with a full plan required every six
years rather than every year as is now
the case and in a separate Joint final
rule with the Fed and the OCC the FDIC
board approved yesterday eliminating
with one exception the liquidity
coverage ratio for banking organizations
with assets between 100 and 250 billion
dollars and leaving in place liquidity
coverage ratio for banks with assets
between 250 and 500 billion that would
only be 85 percent of the current
requirement given the risks associated
with the failure of large regional banks
these measures frankly are unwarranted
and misguided they only increase the
challenges posed by the resolution of
these institutions and the potential for
disorderly failure and they disregard
the lessons of the financial crisis so
in conclusion I want to again thank
Brookings for the opportunity today to
draw attention to the challenges posed
by the failure of a large regional bank
as I indicated I have been increasingly
concerned that the attention that's been
given to the failure of the global banks
since the financial crisis while
entirely appropriate may have obscured
the risks associated with the failure of
a large regional bank and permitted an
unjustified sense of confidence to
develop that the failure such an
institution would not be challenging I
believe the experience during the crisis
of large regional bank failures such as
Washington Mutual or even a smaller 30
billion dollar institution such as
IndyMac illustrates the very real risks
a regional bank failure would present
going forward I believe that attention
to this issue should be a top priority
for the FDIC the other federal estate
bank regulatory agencies and for the
banking industry thank you all very much
[Applause]
thank you very much in preparing for a
sort of questions in your speech I was
going through what some of your fellow
regulators have said about this and
Federal Reserve vice-chairman for
banking supervision governor Quarles
said the following I'd like your
reaction to it or maybe we may know your
reaction which is he said quote most
firms with total assets between 100 and
250 billion do not pose a high degree of
resolve ability risk especially if
they're less complex and less
interconnected that that isn't quite
jibe with what I just heard yeah can you
all hear me
justified sense of confidence in regard
to the failure one of these regional
banks so I would think you know candidly
that comment would would fall in that
category and it's not high it's not
theoretical or hypothetical we had real
experiences and they were scary
Washington Mutual was scary we caught a
break we caught several breaks with
Washington Mutual it could have been
another inflection it was bad it could
have been another inflection point for
the contract for the crisis if it had
gone another way and IndyMac was you
know a really a huge challenge for the
FDIC in every way and that was a 30
billion dollar institution not a 300
billion dollar institution if we had to
do for Washington Mutual what we had to
do for Indy Mac I mean it it it would
have been a real a real I was gonna say
challenge a real problem
and so you know if I have one point to
make today it is don't take it for
granted
you cannot take in some sense we if I
may say the you know we handled all
these hundreds of bank failures during
and after the crisis we being the FDIC
you know with little or no incident and
and I worry a little bit that we've
lulled people into a you know a false
sense of security the the almost all of
those banks had failed were you know
small relatively small community banks
under 10 billion if we had to deal with
a large regional bank failure with some
of the complexities I've talked about
it's a very different set of challenges
with a far more significant set of risks
associated with it it's not that these
risks are insuperable but they need to
be the focus of a lot of attention and
planning and additional as I mentioned
resources and capabilities for the FDIC
so let's get into that a little bit
because you kind of paint a little bit
of a Hobbesian choice so to speak that
you can either have have a failure in a
in a bridge bank like with what happened
with IndyMac which was at only a thirty
billion dollar institution the costliest
resolution in American history you can
get lucky and have a purchase and
assumption that saves the Deposit
Insurance Fund but a corollary of that
that you kind of mentioned in his speech
but didn't delve into is well then the
big get bigger particularly when you
talk about the upper end of the spectrum
that increases concentration in the
system and ultimately can't be
replicated at infinitum that's why I put
such emphasis in the discussion on the
bridge Bank as a tool here for the
resolution because I think you know and
we're dealing with one two three four
hundred billion dollar institutions the
FDIC can't assume
that we're gonna have an acquirer if
anything for planning purposes we really
have to assume a bridge bank scenario
and so the issue here is to get better
and more capable at managing an orderly
failure of a financial institution
utilizing a bridge bank I think that is
the core challenge for the FDIC and I
think we have that capability I think
we've taken steps post-crisis the
resolution plans I believe are critical
the liquidity coverage ratio is an
important liquidity buffer the ability
to make the insured deposit
determination and getting these
institutions to develop the
technological capability to deliver the
information in a timely way to the FDIC
to you know in order to do that those
are really critically important measures
to facilitate an orderly failure of one
of these institutions using a bridge
bank if necessary and I think we need to
give some careful thought to this
unsecured debt issue since it played
such an important role during the crisis
so you know I would hope the choice is
not a Hobbesian one I would hope the
choice is a manageable one but we got to
work at it it needs to be a top priority
and we have to certainly preserve the
measures we've taken to strengthen that
capacity post crisis and we may have to
consider additional measures so I want
to turn to the audience because there's
some real experts in in the room but I
want also dig in a little bit on the
resolution plan which is frequently
called the living wills and a catchy
turn a phrase and some people make the
argument that a living will is like your
will it's really important to do it the
first time it's somewhat it's important
to do after major life events but you
don't need to update your will every
year if nothing big has changed and that
seems to be somewhat of the logic behind
the rules that as you describe change
the time horizon on living will
so how would you respond to that
argument that that you know you don't
need to update your well on an annual
basis why should they update there's you
know there's room for some accommodation
there I think our experience with the
living wills suggests you know going
from annual to a biannual every two
years submission would be pretty
reasonable from the standpoint of the
bank's preparing the resolution plans
and the standpoint of the agencies
reviewing them I do think for the
institutions in the 250 to 500 billion
dollar category going to a three-year
cycle with a full plan every six years I
mean to me that attenuates this process
to an extreme and a full plan every six
years starts raising a question as to
how meaningful and relevant the plan
will be and look for institutions
between a hundred billion and two
hundred fifty the title one holding
company resolution plan requirement has
been discontinued with one exception and
those plans those hundred to two hundred
fifty billion dollar institutions are
big banks and those plans have a lot of
them so that's also one of the things
that fogged in your speech you talked
about the complexity of IT systems and
sometimes I think we think that when we
see an institution of that size it's
always been of that size but the secret
American bangies we should have sixteen
thousand banks most of many of the
institutions in that have have grown
through acquisition and organic growth
over decades which leads to some of the
increased complexities in underlying
systems below if you had a seventy
billion dollar institution today and it
grew through a combination of organic
growth and acquisition how big could how
big could it grow until it has to create
a living will and for how long would
that last going forward because the ones
that were originally captured from one
to two
50 at least had one before that
requirement was removed what does the
outlook look like going forward in that
context let me tell you a fifty billion
dollar banks a pretty big Bank already
and already pretty complicated with
substantial IT systems large numbers of
deposits and I would not take for
granted the orderly failure and the
universe of a potential acquirers at the
50 60 or 70 billion dollar level is
pretty limited as well so we require
plans at the bank level at the insured
depository institution level from 50
billion on up I would not want to give
those plans up I think those plans have
value and they enhance the FDIC's
ability to manage the orderly failure of
these institutions I do not think the
cost is enormous for the institution's
involved and the downside risk based on
experience it can be very high I where
we could talk all day about this but
let's open up the conversation to folks
in the in the audience and please be
brief and identify yourself an ask a
question
Neil Roland Emmerich's news for those of
us who are the opposite of experts can
you use some brush strokes to depict
please the scenario that would ensue or
could ensue with a bank failure
particularly if these institutions are
not so interconnected as vice-chairman
Quarles suggests well you know that we
have the real world example of
Washington Mutual and the real world
example of in diamond
and had Washington Mutual failed
Washington Mutual did fail but we had an
acquirer that made an all deposit
acquisition meaning all of the
depositors insured and uninsured were
passed along to Washington Mutual and no
one took a loss it was forty five
billion dollars of uninsured depositors
if in September of 2008 Washington
Mutual had not been acquired and we
would have had to we being the FDIC
would have had to take over Washington
Mutual ourselves and owned and operated
for a period of time a couple of things
uninsured depositors would likely have
taken losses the millions of uninsured
depositors at other banks I don't want
to get carried away but they might have
taken notice that insured depositors at
Washington Mutual were taking losses and
in September of 2008 where they insure
it were they positive their institution
wouldn't get into trouble and might not
that have affected their actions in
regard to their deposit accounts if the
FDIC had to assume the operational
responsibility for that three hundred
billion dollar thrift institution with a
large branch network that was national
and scope that would have been a heck of
an operational challenge for the FDIC
wash there were a lot of knock-on risks
that the failure of a large regional
bank could have posed to the financial
system certainly in that scenario and
even outside of an extreme crisis
scenario the interbank relationships of
these large regional institutions as
well as the
reliance on uninsured depositors are
significant risk factors so all I'm
saying is these are not your local
community banks these are large pretty
complex institutions with very large
numbers of deposit accounts so I think
we have time for one more question
Bert thank you thank you Marty for your
remarks you talked about what the the
concept potential consequences were of
Washington Mutual or reimu's situations
but I'm wondering when we take a look at
even a smaller situation I think a first
frontier in Greeley Colorado that was
liquidated in 2014 had some serious
economic effects are we possibly at a
point where we need to be realistic as a
nation and politically about what the
downsides are of liquidating a large
bank and specifically trying to impose
losses on uninsured depositors and are
we possibly at a point where the federal
government just basically has to throw
up its hands and say if there is a
financial crisis if there's a large
financial institution and in trouble we
have to protect the federal government
has to protect all of the liabilities of
that bank and not just insured deposits
that's obviously he's the the deposit
insurance coverage is a statutory
standard established by the Congress so
in some sense the question you're asking
if I may say is it is a bit is a bit
above my paygrade you know the the
coverage was as you know significantly
increased during the crisis and made
permanent from a hundred thousand to two
hundred fifty thousand which was a very
substantial increase in reduced the
number of uninsured depositors you know
it's a tough policy call as to whether
in the the notion of large depositors
not being protected is designed to
insure a measure of depositor discipline
in terms of
placing deposits at institutions that's
a long-held value that really goes back
to the creation of the FDIC in 1933 so
I'm not going to you know suggest that
we should have unlimited Deposit
Insurance in the United States but we
clearly need to be very conscious of the
risks involved when you're dealing with
the failure of institutions with a large
amount of of uninsured deposits because
it does present a risk great how does a
code of the increase in that Deposit
Insurance um it wasn't a well in my
opinion a a deeply articulated and
debated moment it occurred for those who
may recall after the first proposal of
what is known as tarp was voted down in
the house before the second version was
brought back so the original proposal
for tarp which was voted down did not
contain that it was only after the
crisis metastasize after the vote that
then that was added by Congress
functionally to get more votes because
you weren't gonna pass any piece of
legislation without the votes join me in
thanking Marty for his
[Applause]
thanks for watching be sure to LIKE and
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[Music]

my name is still Aaron Klein I'm still a

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bank failure::noun | Spocien Dictionary

bank failure

noun

the inability of a bank to meet its credit obligations

Type	Words
Type of	failure

Examples of bank failure

bank failure

Now that the crisis is over, the chances of a bank failure seem extremely remote.

From the nzherald.co.nz

The insurance is quickly available to customers in the event of a bank failure.

From the bucks.blogs.nytimes.com

Washington Mutual later collapsed in the biggest bank failure in U.S. history.

From the charlotteobserver.com

The FDIC guarantees that depositors will be repaid in the event of a bank failure.

From the washingtonpost.com

Buttonwood,Can we get you to run a weekly blog entry for our bank failure guesses?

From the economist.com

The last local bank failure was Sarasota's LandMark Bank of Florida, in July 2011.

From the heraldtribune.com

On the plus side, LandMark may be the region's final bank failure of the recession.

From the heraldtribune.com

The sale kept Coast from becoming the region's first bank failure of the recession.

From the heraldtribune.com

This is Michigan's second bank failure in 2009 and the third in the last 12 months.

From the freep.com

How to pronounce bank failure in English?

bank failure::noun | Spocien Dictionary

abandonment

Related words

Examples of bank failure

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