Bank Failure Process

Question 1

Four main options to address a failing institution?

Answer 1

1. Purchase and Assumption
2. Bridge Banks
3. Depositor Payoffs
4. Open Bank Assistance

Question 2

Bridge Bank Process

Answer 2

1. FDIC creates a bridge bank
2. Insured deposits and secured debt liabilities are transferred to the bridge bank
3. High quality assets are transferred to the bridge bank
4. FDIC operates bridge bank under it can be sold to an acquirer
5. Failed bank is resolved into receivership.

Question 3

Where do banks file resolution plans/living wills?

Answer 3

FDIC

Question 4

Purpose of the lender of last resort

Answer 4

Temporary liquidity support to discourage bank runs and bank failures.

Question 5

Discount Window

Answer 5

This enables the Fed to make short term loans to struggling banks that are secured by high-quality collateral and at an above market interest rate (or penalty rate).

Question 6

Restrictions on 13(3) authority

Answer 6

1. No insolvent borrowers
2. Cannot be established to assist a single company avoid bankruptcy or resolution.

Question 7

FDIC Depositor payoff process

Answer 7

1. The FDIC creates a DINB
2. The FDIC pays creditors out of the DINB
3. The depositors’ claims are subrogated to the FDIC
4. The failed bank is placed into receivership

Question 8

FDIC purchase and assumption process

Answer 8

In a purchase and assumption transaction, the FDIC arranges the sale of a troubled or insolvent financial institution to a healthy one, where the depositors become depositors of the new bank. New bank adjusts the interest rates.

Question 9

Basic idea of Liquidity Coverage Ratio

Answer 9

The proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations.

Question 10

Orderly Liquidation Authority

Answer 10

1. Applies to BHCs and designated companies
2. Initiation requires the Fed, the FDIC & the Treasury Secretary
3. Bridge company structure
4. Bridge is expected to self fund, but the FDIC can lend

Question 11

TLAC

Answer 11

Equity plus unsecured debt that can be converted to common equity in bankruptcy.