Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Final Rule to Avoid Costly Megamergers

Today, the FDIC is considering amendments to its rules regarding the resolution plans required of very large banks with $50 billion or more in assets.¹ The rules will require these banks to submit plans to the FDIC demonstrating how they could be wound down without a costly megamerger.²

When a community bank fails, the FDIC can market the failed bank to a wide range of potential acquirers and sell it to the highest bidder. Even if this process takes more time than desired, the risks to the broader financial system and costs to the Deposit Insurance Fund are minimal.

The story is much different for a very large bank. First, there is a much smaller pool of potential bidders that would be able to purchase the firm. Second, very large banks are typically much more complex. The smaller pool of potential bidders will face more unknowns without the ability to conduct significant due diligence. And most importantly, failures of very large banks can immediately invite concern about contagion in the financial system. All of these factors tend to lead to an outcome where the FDIC sells a failed bank to an even bigger one, with huge costs to the Deposit Insurance Fund.

Plans submitted pursuant to these rules will help the FDIC pursue other strategies, such as breaking up a failed bank into valuable components and selling it to multiple buyers or spinning the failed bank back out into private hands through an initial public offering or other transaction.

The rule also includes capabilities testing requirements to make sure banks have the capacity to execute these alternative strategies. For example, can the bank quickly supply the information necessary to open a virtual data room for bidders to conduct due diligence? Has the bank thought through and addressed personnel, IT infrastructure, and contractual obstacles to breaking it up and selling it in pieces?

In conclusion, I support today’s rule amendments. The required plans will help to reduce costs to the Deposit Insurance Fund, mitigate the risk of contagion, and reduce the creep of concentration in our banking sector.

References

1. The resolution plans, codified at 12 C.F.R. Part 360.10, generally cover the insured depository subsidiary, and contemplate a resolution under the Federal Deposit Insurance Act. These plans are distinct from, but complementary to, the Dodd-Frank Act Title I “living wills” that are submitted by the holding company, cover the entire conglomerate, and contemplate resolution under Chapter 11 of the U.S. Bankruptcy Code.
2. The final rule applies more stringent requirements to banks with $100 billion or more in assets.