CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1001
bars the FDIC from using the DIF to assist the OLF or from using the
OLF to assist the DIF. 205 However, the FDIC could conceivably
assert authority to borrow up to $100 billion from the Treasury under
§ 1824(a) for the “insurance purpose” of financing an orderly
liquidation of a SIFI outside the funding parameters of the OLF.
Assuming that such supplemental borrowing authority is available to
the FDIC, the FDIC could use that authority to protect a SIFI’s
uninsured and unsecured creditors as long as such protection
“maximizes” the value of the SIFI’s assets or “mitigates the potential
for serious adverse effects to the financial system.” 206
The “systemic risk exception” (SRE) to the Federal Deposit
Insurance Act (FDIA) provides a further potential source of funding
to protect creditors of failed SIFIs. 207 Under the SRE, the Treasury
Secretary can authorize the FDIC to provide full protection to
uninsured creditors of a bank in order to avoid or mitigate “serious
effects on economic conditions or financial stability.” 208 Dodd-Frank
amended and narrowed the SRE by requiring that a bank must be
placed in receivership in order for the bank’s creditors to receive
extraordinary protection under the SRE. 209 Thus, if a failing SIFI
owned a bank that was placed in receivership, the SRE would permit
the FDIC (with the Treasury Secretary’s approval) to provide full
protection to creditors of that bank in order to avoid or mitigate
systemic risk. By protecting a SIFI-owned bank’s creditors (which
could include the SIFI itself), the FDIC could use the SRE to extend
indirect support to the SIFI’s creditors.
Two provisions of Dodd-Frank seek to prevent the FRB and the
FDIC from providing financial support to failing SIFIs or their
subsidiary banks outside the OLA or the SRE. First, section 1101 of
strongly indicates that funds borrowed by the FDIC under § 1824(a) do not have to be
used exclusively for the DIF and can be used for other “insurance purposes” in accordance
with the “judgment” of the Board of Directors of the FDIC. It could be argued that
borrowing for the purpose of funding the OLF would fall within such “insurance
purposes.”
205 Dodd-Frank Act § 210(n)(8)(A).
206 § 210(a)(9)(E)(i), (iii).
207 See FIN.CRISIS INQUIRY COMM’N, supra note 122, at 10–11, 29–32 (discussing the
SRE under 12 U.S.C. § 1823(c)(4)(G), as originally enacted in 1991 and as invoked by
federal regulators during the financial crisis).
208 In order to invoke the SRE, the Treasury Secretary must receive a favorable
recommendation from the FDIC and the FRB and consult with the President. 12 U.S.C. §
1823(c)(4)(G)(i).
209 See Dodd-Frank Act § 1106(b) (amending 12 U.S.C. § 1823(c)(4)(G)).