Sunday, May 13, 2012

FDIC to spare healthy units of failing banks

WASHINGTON - Regulators plan to employ a strategy for handling big failing banks that would help stabilize the financial system by preserving the banks' healthy operations, the head of the Federal Deposit Insurance Corp. says.

FDIC acting Chairman Martin Gruenberg outlined the agency's strategy in a speech Thursday. Under the 2010 financial-overhaul law, the agency has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The aim is to avoid another taxpayer bailout of Wall Street banks in another financial crisis.

Gruenberg said that under the strategy, the FDIC would take over a failing bank's parent company but allow its healthy subsidiaries to continue operating. He said that would reduce disruption and permit normal financial transactions.

Because the subsidiaries would keep operating, their trading and other relationships with other big financial institutions also would continue normally and "mitigate systemic consequences," Gruenberg said in the speech at a Federal Reserve conference in Chicago. That would reduce the chance that closely connected big financial firms would fall like dominoes.

In shutting down a bank's parent company, the FDIC would transfer its assets, especially holdings in its subsidiaries, to a new "bridge" company. Shareholders would lose their investment. Its creditors would receive equity stakes in the "bridge" company.

Eventually, the bridge company would become a healthy company in private hands, Gruenberg said.

FDIC officials cite Lehman Brothers' collapse in 2008 that precipitated the financial meltdown and Great Recession. Despite Lehman's extensive losses, there were valuable assets in some subsidiaries, especially its European operation, based in London, they say. When Lehman failed, that operation had to be dissolved under British law. The FDIC strategy would permit such an operation to continue.

by Marcy Gordon - May. 10, 2012 06:21 PM Associated Press


FDIC to spare healthy units of failing banks

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