U.S. Banks Asked to Plan for Bankruptcy
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U.S. Banks Asked to Plan for Bankruptcy

September 21, 2011


Last week, the Federal Deposit Insurance Corporation (FDIC) requested that 37 major financial institutions submit disassembly plans so that, in the event of bankruptcy, the dissolution process might go smoothly, according to reports from AFP.

The FDIC regulates and insures banks in the U.S. and has issued the new rule in response to fallout from the financial crises of 2008. The rule, which takes effect January 1, 2012, requires FDIC-backed institutions with assets that meet or exceed $50 billion to prepare for the worst and submit dissolution plans.

Regulators instituted the new policy to prevent institutional failure from causing excessive disarray in the marketplace (i.e. to prevent institutions that are "too big to fail" from taking down related companies and markets in the event of failure). The 37 banks included in the FDIC notice collectively hold about 60 percent of all FDIC-insured funds (or approximately $2.2 trillion), according to sources.

Banks with the most assets ($250 billion or more in U.S. assets), and therefore stand to impact the economy the most, must submit their plans by July 1, 2012. Smaller banks (those whose assets exceed $100 billion) have been given until July 1, 2013; the remaining banks have a deadline of December 31, 2013.

Sources note that the FDIC has implemented the rule to help guarantee that people are able to access their FDIC-backed funds within 24 hours of a financial institution's failure or bankruptcy filing. In theory, institutions with plans for their own dismantlement will allow regulators to handle a failure as efficiently and inexpensively as possible.

In 2008, the large investment bank Lehman Brothers failed and jump-started the economic downturn that still haunts markets today. That failure prompted the FDIC to reevaluate its regulatory requirements for large financial institutions and led it to impose the new rule.

The FDIC was founded in 1933 in response to the bank runs and subsequent bank failures that occurred during and perhaps worsened the Great Depression. Before the FDIC's inception, banks had no backing and so depositors stood to lose their life savings if a bank failed. Today, individual deposits up to $250,000 in most banks are insured by the FDIC.

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