Dangerous Defects In Resolution Planning For Global Systemically Important Banks

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