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The FDIC’s Orderly Liquidation Authority

The Federal Deposit Insurance Corporation Office of Inspector General has issued its report on The FDIC’s Orderly Liquidation Authority. 

Before the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA), the FDIC only had the authority to resolve FDIC-insured depository institutions.  Title II of the DFA, Orderly Liquidation Authority (OLA) aimed to provide the necessary authority to the FDIC to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard. 

We conducted an evaluation to determine whether the FDIC maintained a consistent focus on implementing the OLA program and established key elements to execute the OLA under the DFA.

We determined that the FDIC has made progress in implementing elements of its OLA program, including progress in OLA resolution planning for the global systemically important financial companies (SIFC) based in the United States.  However, we found that in the more than 12 years since the enactment of the DFA, the FDIC has not maintained a consistent focus on maturing the OLA program.  Since the enactment of the DFA, the FDIC’s focus on other important, but competing, priorities delayed maturity of the OLA program.

We also found that the FDIC has not fully established key elements to execute its OLA responsibilities, including in the following areas:

  • OLA Policies and Procedures.  The FDIC has made significant progress in developing high-level policies and procedures for the execution of an OLA resolution of a systemically important bank holding company.  However, it has not completed operational-level policies and procedures, nor identified how it would need to adjust its policies and procedures for an OLA resolution of other types of SIFCs.  In addition, the FDIC has not developed two regulations required by the DFA or completed policies and procedures for ongoing OLA resolution planning activities.
  • OLA Roles and Responsibilities.  The FDIC has not fully defined governance and individual practitioner-level roles and responsibilities related to the execution of an OLA resolution.
  • OLA Resources, Training, and Exercises.  The FDIC needs to obtain additional staff resources to plan for an OLA resolution, and to fully identify and document the staff and contractor resources needed to execute an OLA resolution.  In addition, the FDIC needs to enhance OLA-related training and exercises to regularly ensure that personnel have the skills needed to execute an OLA resolution.
  • Monitoring of OLA Activities.  The FDIC does not have adequate monitoring mechanisms in place to ensure it promptly implements the OLA program and consistently measures, monitors, and reports on the OLA program status and results.
  • Crisis Readiness-Related Planning.  The FDIC has not documented a readiness plan for executing OLA resolution authorities in a financial crisis scenario involving concurrent failures of multiple SIFCs.

Absent a consistent focus and fully established key elements for executing the OLA, the FDIC may not be able to readily meet the OLA requirements for every type of SIFC the FDIC might be required to resolve.  If the FDIC were unable to resolve a SIFC, the banking sector and the stability of the U.S. and global financial systems could be severely affected. 

We made 17 recommendations to the FDIC intended to improve key elements for executing the FDIC’s OLA responsibilities.  The FDIC concurred with all of these recommendations and plans to complete corrective actions by December 31, 2025.