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Title XI - Federal Reserve System Provisions
Title XI of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act): (1) limits the ability of the Board of Governors of the Federal Reserve System (Federal Reserve) from making loans and the Federal Deposit Insurance Corporation (FDIC) from guaranteeing debt during financial crises;1 and (2) addresses Federal Reserve corporate governance matters.
Federal Reserve Liquidity Programs
Section 1101 amends Section 13(3) of the Federal Reserve Act (12 U.S.C. 343) by eliminating the ability of the Federal Reserve to unilaterally make loans to individuals, partnerships, and corporations in “unusual and exigent circumstances.”2 Instead the Federal Reserve is required to establish by regulation and in consultation with the Secretary of the Treasury policies and procedures for emergency lending to participants in programs or facilities with broad-based eligibility. The regulations must be designed to ensure that emergency lending is for the purpose of providing liquidity to the financial system and not to aid a failing financial institution. Further, the security for the loans must be sufficient to protect taxpayers from loss. The Federal Reserve’s procedures must prohibit borrowing from the programs and facilities by insolvent borrowers. A borrower is deemed to be insolvent if the borrower is: (1) in bankruptcy; (2) in resolution under Title II of the Act; or (3) in resolution under any other Federal or State insolvency proceeding.
While the Act does not define “broad-based eligibility,” it specifically identifies a program that would not be broad-based: a program or facility that is designed to “remove assets from the balance sheet of a single and specific company, or that is established for the purpose of assisting a single and specific company avoid bankruptcy, resolution under title II of the [Act], or any other Federal or State insolvency proceeding.”3 As a result, the Act eliminates the Federal Reserve’s ability to fashion individualized deals.
The Federal Reserve must obtain the approval of the Secretary of the Treasury prior to the establishment of any liquidity program or facility under Section 13(3) and must provide reports to the Committee on Banking, Housing, and Urban Affairs that includes the justification for the exercise of authority under Section 13(3), the identity of the recipients, the date and amount of assistance, and the material terms.
If any company that receives assistance under a Section 13(3) program later becomes a covered financial company under Title II of the Act, and the Federal Reserve bank that made the loan incurs a loss, then the Federal Reserve bank will have a claim equal to the amount of the net realized loss with the same priority as obligations to the Secretary of the Treasury under Section 210(b) of the Act.
Sections 1102 and 1103 of the Act provide for audits of the programs and facilities established by the Federal Reserve under Section 13(3) and “covered transactions” as defined in Section 11(s) of the Federal Reserve Act4 and disclosure of certain audit results to the public.
FDIC Liquidity Guarantees
Section 1105 and Section 1106 of the Act circumscribe the FDIC’s current systemic risk powers found at 12 U.S.C. 1823(d)(4)(G), which were used by the FDIC to establish the Temporary Liquidity Guarantee Program announced on October 13, 2008.5 As a result of the Act, prior to the establishment of a liquidity program that would guarantee obligations of solvent6 depository institutions or holding companies (and their affiliates), the FDIC, the Federal Reserve and the Secretary of the Treasury must agree that a liquidity event exists that would warrant the use of a guarantee program under Section 1105 of the Act.7 Upon the determination of a liquidity event – defined as an exceptional and broad reduction in the general ability of financial market participants to sell financial assets without unusual and significant discounts or to borrow using financial assets as collateral without unusual and significant increases in margins or an unusual and significant reduction in the ability of financial market participants to obtain unsecured credit8 – then the FDIC is granted authority to create a widely available guarantee program. The program will have a maximum guaranteed amount that is determined by the Secretary of the Treasury in consultation with the President and that has received the approval of the United States Congress by joint resolution of the Senate and the House of Representatives under expedited proceedings.9 Absent the approval of the Senate and House, the FDIC is prohibited from issuing the debt guarantees. The terms and conditions of the program established by the FDIC must have the concurrence of the Secretary of the Treasury.10
The FDIC is tasked with promulgating regulations implementing the guarantee program as soon as practicable following the enactment date and is directed to assess fees and other charges to all participants in amounts that are necessary to compensate for projected losses. Any excess funds collected will not be returned to participants but instead will be deposited into the General Fund of the Treasury.11 The FDIC may borrow from the Secretary of the Treasury for purposes of carrying out the program, but may not borrow from the Deposit Insurance Fund. Additionally, the FDIC is empowered to require backup special assessments to cover losses or expenses. The FDIC is, however, prohibited from taking an equity interest in any form.12
If a participant defaults on any obligation guaranteed by the FDIC, then the FDIC will: (1) appoint itself as receiver for any defaulting insured depository institution; and (2) for any other non-depository institution participant: (A) require consideration of whether the defaulting participant should be resolved under Title II of the Act or require the defaulting participant to file bankruptcy under Section 301 of Title 11 of the United States Code if the FDIC is not appointed receiver under Section 202 of the Act within 30 days of the date of default; or (B) file a petition for involuntary bankruptcy under Section 303 of Title 11 of the United States Code.13
Federal Reserve Corporate Governance
Section 1107 amends Section 4 of the Federal Reserve Act to provide that the president of a Federal Reserve bank will be appointed by the Class B and Class C shareholders of such bank, thus eliminating votes by the depository institution shareholders.
Section 1108 amends Section 10 of the Federal Reserve Act to provide for an additional Vice Chairman of the Federal Reserve. The new Vice Chairman will be the Vice Chairman of Supervision and will be tasked with developing policy recommendations for the Board of the Federal Reserve with respect to supervision and regulation of depository institution holding companies and other financial firms supervised by the Federal Reserve under the Act and with overseeing the supervision and regulation of such firms. The Vice Chairman of Supervision will be appointed by the President subject to the advice and consent of the Senate. Further, Section 1108 states that the duty of the Board of Governors of the Federal Reserve with respect to supervision and regulation cannot be delegated to Federal Reserve banks or their presidents.
Section 1109 requires the Comptroller General to audit loans and financial assistance provided by the Federal Reserve under Section 13(3) of the Federal Reserve Act during the period beginning on December 7, 2007, and ending on the date of enactment of the Act. Additionally, the Comptroller General is to perform a complete audit of the Federal Reserve bank system.
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[1] Joint Explanatory Statement of the Committee of Conference at page 875.
[2] Section 13(3) was the statutory authority by which the Federal Reserve provided liquidity to American International Group, Inc., The Bear Stearns Companies, Inc., and established certain programs, including the Term Asset-Backed Securities Loan Facility, the Money Market Investor Funding Facility and the Commercial Paper Funding Facility.
[3] Section 1101(a)(6).
[4] As added by the Act, Section 11(s) defines “covered transaction” as “any open market transaction with a nongovernmental third party conducted under the first undesignated paragraph of Section 14 or subparagraph (a), (b) or (c) of the 2nd undesignated paragraph of such section, after the date of enactment of the [Act]; and . . . any advance made under section 10B after the date of enactment of [the] Act.”
[5] FDIC Press Release of October 14, 2008, “FDIC Announces Plan to Free Up Bank Liquidity” available at www.fdic.gov.
[6] The term solvent means that the “value of the assets of an entity exceed its obligations to creditors.” Section 1105(g)(4).
[7] Section 1104(a). Section 1104(b) requires that the determination receive a two-thirds vote of the members of the FDIC and a two-thirds vote of the members of the Federal Reserve. Further, the Secretary of the Treasury may request a determination by the FDIC and the Federal Reserve or the Federal Reserve and the FDIC may make a determination on their own motion and take action after approval by the Secretary of the Treasury.
[8] Section 1105(g)(3).
[9] Section 1105(b)(2) contemplates the ability to increase the initial debt guarantee amount by following similar procedures.
[10] Section 1105(c)(1).
[11] Section 1105(e).
[12] Section 1105(a).
[13] Section 1106(c).
If you have questions regarding anything you have read on Title XI, please contact any of the attorneys listed below or your regular Sutherland contact.
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Roadmaps
Title XI - Key Provisions and Regulatory Rulemakings
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