Regulation of Banking and Financial Services
The Failure Process Imposed Upon Financial Institutions
The concept of systemic risk sprung to the foreground of the public’s consciousness during the financial crisis of 2007-8 as the Too Big To Fail (TBTF) banks were bailed out by the various US Federal Government agencies e.g., US Treasury via the Troubled Asset Relief Program (TARP) and the US Federal Reserve via Quantitative Easing (QE). However, as it turns out, the concept of systemic risk is not so easy to define in legal terms—as illustrated by the difficulty in nailing down the definition by US Congress via the Dodd-Frank legislation or by the US Treasury and the Federal Deposit Insurance Corporation (FDIC) via regulation (Horton, 2012). One thing is certain—the public has no stomach for any further bailouts, thus, the era of TBTF banks and non-bank financial companies has ended.
The FDIC, under new regulatory powers granted by Dodd-Frank, will resolve systemically important bank and non-bank financial institution failures i.e., bank and non-bank financial institutions that become insolvent (Horton, 2012). This process is similar to the way that the FDIC utilizes its traditional regulatory powers to resolve non-systemically important bank failures. However, non-systemically important non-bank financial institutions continue to be able to utilize bankruptcy as an option to resolve insolvency (Smith, 2011). While the FDIC has the regulatory power to resolve systemically important bank and non-bank financial institution failures it [the FDIC] will not be able to utilize them until the next financial crisis, which means the FDIC’s primary role will be to resolve non-systemically important bank failures (Guynn, 2012).
The two most used procedures by which the FDIC resolves bank failures are (a) a deposit payoff, and (b) purchase and assumption (Rose & Hudgins, 2013). With a deposit payoff, the bank’s depositors are paid by the FDIC up to the $250,000 FDIC insurance limit with any deposit balance above this limit repaid based on the residual value of the bank’s assets; with a purchase and assumption, a healthy bank purchases some or all of the failed bank’s assets and deposits (Rose & Hudgins, 2013). The goal of the FDIC in resolving the failure of a bank or systemically important non-bank financial institution is to maximize the value of the failed institution’s assets while minimizing the damage to the broader financial system (Guynn, 2012).
In conclusion, because of the 2007-8 financial crisis and the resulting Dodd-Frank legislation the era of the TBTF bank and non-bank financial institution is over. The FDIC now has the regulatory authority to liquidate these [formerly] TBTF bank and non-bank financial institutions in an orderly manner. The ultimate goal of the FDIC’s new regulatory powers is to protect the taxpayer from another bailout.
Restrictions on Geographic Expansion by Financial Institutions
Restrictions on the geographic...