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11 November 2009

FDIC Bair calls for new resolution system

Sheila Bair strongly supports requiring all systemically important financial institutions to prepare so-called 'living wills'. Bair also calls for a reserve fund and higher capital requirements, as proposed in the Basel II proposal.

FDIC chairman Sheila Bair strongly supports to require all systemically important financial institutions to prepare so-called "living wills".


We must have an effective and credible resolution mechanism that provides for the orderly wind-down of systemically important financial firms”, Bair reaffirmed. “I believe that the best option is to create a resolution mechanism that makes it possible to break-up and sell the failed firm”, she said.


All systemically important financial institutions should be required to prepare detailed plans for their dissolution, the so-called "living wills".


The funding for working capital should come from the industry, she said. “A reserve fund should be established, maintained and funded in advance of any failure by imposing risk-based assessments on the industry”, she proposed.


Turning to the issue of international cooperation, the BIS recommends reform and greater harmonization of national laws to achieve more effective tools to resolve cross-border institutions. However, “a more 'universal' resolution approach will require us to address some difficult issues – such as how to share the costs of a resolution and how to provide an international forum to resolve disputes”, she said.


Bair also calls for stronger bank capital standards criticising the new Basel II standards. Although the “Basel I-based capital requirements were too low, bank supervisors around the world are diligently implementing a rule designed to lower those requirements still more”, she said.


A final major task in creating a new resolution process is considering alternative measures that will curb the unbridled growth and complexity of large, systemically important firms, Bair said, proposing to significantly raise the cost of being too big or interconnected.


“Institutions deemed to pose a systemic risk by virtue of their size or activities should be subject to higher capital and liquidity requirements – as well as higher deposit insurance premiums – commensurate with the risks they pose to the system and the competitive benefits they derive from their unique regulatory situation.“


The US Financial Services Committee is to come forward with a report on the too-big-to-fail issue later this week.


Full speech Bair



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