Remarks by Jonathan McKernan, Director, FDIC Board of Directors, at the New York State Bar Association and Mayer Brown on the Basel Endgame and Long-Term Debt Proposals
Thank you for this opportunity to speak with you all today.
I think it’s probably fair to say it’s been an eventful last six or seven months at the FDIC. Just two months after I arrived, we confronted the second, third, and fourth largest bank failures in FDIC history. For better or worse, we made the decision to invoke the FDIC’s emergency powers—the so-called “systemic risk exception”—to facilitate the resolutions of SVB and Signature.
Now, that decision was, in my view, an admission that 15 years of costly reform efforts had still not left us with an effective framework for resolving failed banks. But I don’t think the solution is to pile on yet more prescriptive regulation or otherwise try to push responsible risk taking out of the banking system.
Instead, we should try to accept—I mean truly accept—that bank failures, even large bank failures, are an inevitable result of a dynamic and innovative economy. We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending this practiced habit we have developed of privatizing gains while socializing losses.
That is why I supported our proposal to require certain large banking organization to have outstanding a minimum amount of long-term debt. That is also why I have kept an open mind on proposals to enhance our regulatory-capital framework.
All that said, I was of course not able to get to “yes” on our July proposal to implement the Basel Endgame standards.
And so I would like to take this opportunity to elaborate some points on my Endgame statement. First, I’ll explore further a point I advanced that we have not provided an adequate rationale for some of our key design decisions. Second, I’ll address some counterarguments I’ve heard to my concern that the proposal will push intermediation out of the banking system. And finally I’ll close with an open question on our long-term debt proposal.
I’m mindful of course that we have an open comment period on each, so I’ll limit myself to clarifying my Endgame and long-term-debt statements. But my hope is that a takeaway of today’s discussion is that important aspects of the Endgame proposal are underdeveloped, they are contested, and they are exceedingly consequential. Hopefully that helps make the case for interested parties to take seriously their opportunity to submit comments. I know many are already doing that.
This debate is an important one. It should be a vigorous one.
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