The FDIC is progressing in its development of new rules that will apply to financial firms — not just banks — deemed “too big to fail.” The rules would establish procedures for unwinding companies whose failure would pose a threat to the economy, when that failure appears to be imminent. The government organization approved a set of proposed rules and is now looking for comments from the public. A 91-page PDF explains the current proposed rules. Although the comments have not been enabled yet, you will soon be able to send messages to the FDIC on this proposal here.
Congress has already given more authority to the FDIC to unwind large financial institutions as they have been doing for failing banks. According to the director of the FDIC, this will shift the responsibility of keeping the country’s economic system stable from taxpayers — all of us who bailed out the financial industry through our tax dollars — to shareholders of companies deemed “too big to fail.”
Just like banks pay fees to FDIC now, to ensure coverage if their institutions fail, companies covered in these new procedures will likely need to pay for the protection. We’ve seen bank products increasing cost to the consumer, as companies pass higher expenses down the line, and I expect the same will happen to a broader mix of financial companies. Years ago, regulation forced companies too large to break up into smaller companies, but the government is taking a different approach today. Through this plan, financial companies might find it less profitable to be considered in the “too big to fail” category.
Doing business with a “too big to fail” company most likely means paying more for services you can find elsewhere. The selection of available services may be broad and the services might be convenient, but just like the CoinStar issue, you’ll need to determine whether the convenience is worth the extra cost.
Large financial institutions have also been able to attract the best talent, thanks to stratospheric compensation packages. The proposed rules include a clawback provision; if a company fails and regulators determine that certain executives did not perform their job well enough or could have prevented the collapse, they might decide those responsible executives must return some of their compensation. If this rule survives the final implementation of the procedures, larger firms may have a more difficult time attracting talent. The FDIC is in the process of suing to recover compensation from bank executives responsible for the recent economic collapse, but according to the Washington Post, these suits are moving slower than they should, particularly when compared to the situation after the Savings and Loan crisis in the 1980s and early 1990s.
I don’t know whether it’s possible to fully avoid financial companies considered “too big to fail.” With the knowledge that these regulations are coming, we can guess how it may reshape the financial industry, from fees to company sizes.
Published or updated March 15, 2011.
{ 9 comments… read them below or add one }
I seem to do better with smaller, local institutions. The executives should be held accountable, at least as far as bonuses are concerned. Bonuses should be earned, not expected.
I agree!!! I always try to support local too.
this is such an important issue. i agree. executives should be held accountable, with regards to bonuses, but also when things go wrong. i look at all the financial crises in the past, and not only have so many gone unpunished, but they were rewarded. this has to change.
My experience has taught me to consider any money I loan to family a gift, and if i get paid back, that’s great. Friends are a different story. If I care enough about you to loan you money, and you don’t pay me back without my hounding you for the money, I won’t risk the relationship, so I’m very particular about who I call “friend”. I do have two children who always pay me back (the ones who make the least money), but the one who owes me about $20,000 never gets anything from me nowadays except my love.
I’m confused by the second to last paragraph regarding lawsuits for compensation (as well as after the Savings and Loan Crisis). Exactly what is the FDIC suing for, and what is the basis? If one breaches fiduciary responsibility, can one really be sued for past compensation? It would seem to me that a lawsuit would be for liability (similar to malpractice in medicine).
I looked through the Washington Post article and it wasn’t clear there either.
I do more research now on banking and a lot of companies that I buy certain services from.. I do like the feel of smaller community places but unfortunately, they are not very convenient if I have to travel 25 mins to get to the nearest branch which is actually a problem I had with the last “too big to fail” bank I was with. I finally found a “big” bank that has fair terms(or at least I think the terms are fair).
I agree that money loaned to family and friends should be considered a gift – I have stopped loaning money to family members – after making payments for one on her car, house, insurance etc, to hear that she was going to go tan before meeting her friends at a club.
Please remember nothing is to big to fail, even if the gov’t bails it out, it causes a lot of havoc in people’s lifes and bottom line, so that is failure.
I don’t see anything in this about raising fees or adding any kind of insurance.
From what I gather its just a process the FDIC will use to liquidate companies after they fail. A big part of it is prioritizing who gets paid first and another part is the ability to take back salary and bonus money paid to the executives who were in charge when the company in question failed.
No, there’s nothing concrete about fees yet… but there’s good evidence to suggest that some sort of charge to companies that would be covered under this new failure insurance will need to pay. Just as FDIC does for banks, currently. Part of the problem in the latest financial meltdown is that Congress hasn’t allowed FDIC to collect the fees from banks to qualify for their coverage, so FDIC had to borrow money from the government. This funding problem should be addressed now that FDIC is looking to expand its responsibilities to cover non-bank financial companies.