“SPOE” Resolution Strategy for Systemically Important Financial Institutions Under Dodd-Frank: FDIC Seeks Comment on Its “Single Point of Entry” Strategy for Resolving Systemically Important Financial Institutions Under Title II of the Dodd-Frank Act

Sullivan & Cromwell LLP - December 12, 2013

On December 10, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) proposed for public comment a notice (the “Notice”) describing its “Single Point of Entry” (“SPOE”) strategy for resolving systemically important financial institutions (“SIFIs”) in default or in danger of default under the orderly liquidation authority granted by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Notice follows the FDIC’s endorsement of the SPOE model in its joint paper issued with the Bank of England last year.

The SPOE strategy entails the appointment of the FDIC as receiver for only the SIFI’s top-level U.S. holding company, while permitting the operating subsidiaries of the failed holding company to continue their operations uninterrupted. As receiver, the FDIC would establish a bridge financial company for the failed U.S. holding company to which the FDIC would transfer the assets and certain very limited liabilities of the receivership estate. The claims of unsecured creditors and other claimants in the receivership would be satisfied by issuance of securities by one or more new holding companies that would emerge from the bridge financial company through a securities-for-claims exchange.

The SPOE strategy seeks to achieve two basic goals. One is to carry out the Dodd-Frank mandate of ending “too-big-to-fail.” To this end, management of the failed SIFI responsible for its failure would be replaced; shareholders would be wiped out (or virtually so); creditors of the failed SIFI would bear the losses resulting from the failure; and taxpayers would bear no losses. The second goal is to fulfill the Dodd-Frank mandate of limiting disruption to the U.S. financial system.

The FDIC has requested comment on critical aspects of its SPOE strategy, including what level and types of capital and debt SIFIs should maintain to optimize a SPOE resolution, how and when the OLF should be utilized and how the foreign operations of a failed SIFI should be treated in a SPOE resolution. Resolution of these issues should significantly advance the development of a defined and effective resolution structure for SIFIs.

The FDIC’s Notice provides for a 60-day comment period following publication in the Federal Register.