Abstract
The Dodd-Frank Act requires each Global Systemically Important Bank ("GSIB") to submit, and the regulatory agencies to approve, a plan for resolution of its holding company's insolvency in a chapter 11 bankruptcy. The eight American GSIBs have adopted resolution plans that provide for the holding company to assume the losses of insolvent subsidiaries, so that only the holdco enters "resolution" -- a "Single Point of Entry" ("SPOE"). This appears consistent with Dodd-Frank's command that a holdco serve as a "source of strength" for its insured banks. Unfortunately, the agencies have approved GSIB resolution plans that fail to assure insured bank subsidiaries of holdco support because the plans are based on defective secured support agreements. The agreements are defective because they can be amended without prior regulatory consent, they are secured by undisclosed and changeable collateral that can be deployed at management's discretion, and they are not specifically enforceable in the holdco's bankruptcy. The agencies could remedy all of these defects without new legislation or regulation, by requiring, as part of their annual resolution plan review, amendments to each GSIB's support agreement giving the agencies the right to enforce the agreement for the benefit of the GSIB's bank and publicly disclosing (and maintaining) collateral pledged to support the bank. The failure of the agencies to do so leaves GSIB management the power to allocate holdco resources away from insured banks and to non-bank affiliates, exposing the FDIC to greater losses and contravening Dodd-Frank's source-of-strength mandate.
Originally published by SSRN.
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