The FDIC's plan is aimed at the nation's largest, most complex financial institutions, which would pose a risk to the entire system if they were to fail. As such, they require a unique plan, as opposed to the typical course for a bank failure — their sheer size alone would make it difficult, if not impossible, to simply hand off the failed bank's operations to another institution that could handle it, according to Gruenberg.
Under the plan, regulators would step in, take over the bank and quickly place it in receivership. They would then establish a new "bridge" company, which would receive all the assets from the failing bank. Doing so will allow any healthy subsidiaries within the bank to remain operating, minimizing the ripples in the financial system.
Equity shareholders in the original bank would see their investments wiped out, and debt holders in the bank would see their investments reduced, then converted into equity in the new institution.
The government would initially retain control over this new company, and Dodd-Frank grants the FDIC the power to temporarily pump funds into it to keep it afloat — any government funds spent to do so would later be repaid by either the new institution or the financial sector.
Republicans singled out this power in legislation approved by the House on Thursday, which contains a number of provisions aimed at replacing the automatic spending cuts set to take effect at the end of the year.
Gruenberg said the goal is to quickly transition from government control to establish a new board and CEO for the spun-off bank, who will be named by the original debt holders, who are now investors in the new institution.
He added that the FDIC is working with international regulators to iron out how a U.S. bank's international components could be wound down if needed.