The United States is home to one of the most advanced and stable financial systems in the world. However, bank failures remain a genuine concern for international bank creditors. In the United States, the primary legislation governing banks and their operations is the Federal Deposit Insurance Act. This act creates a framework for federal and state authorities to regulate banks and ensure their solvency. In the event of bank failure, the Federal Deposit Insurance Corporation (FDIC) is the primary agency responsible for overseeing the resolution process.

Over the years, several US banks have received exorbitant fines for various wrongdoings. These include JPMorgan Chase, Bank of America, and Wells Fargo, among others. The penalties, reaching billions of dollars, were imposed for various reasons, such as mortgage fraud, money laundering, and manipulation of interest rates. Despite these significant fines, regulators have opted not to shut down these banks due to their systemic importance and the potential consequences of such actions on the economy.

Bank Failure in the USA

Bank failure in the United States is generally defined as a situation where a bank becomes insolvent or unable to meet its obligations to depositors and other creditors. The Office of the Comptroller of the Currency (OCC) and the Federal Reserve are responsible for determining bank failure. They monitor banks’ financial health and intervene when necessary to prevent a bank’s collapse or to resolve a failing bank.

The FDIC, OCC, and the Federal Reserve are the main supervisory authorities responsible for overseeing banks in the USA. Their legal mandate includes ensuring banks’ safety and soundness, preserving public confidence in the banking system, and protecting depositors’ and creditors’ interests. These agencies work together to evaluate a bank’s financial condition, identify potential issues, and initiate appropriate actions to minimize the risks associated with bank failures.

Once a bank failure is identified, the FDIC typically steps in as the receiver and manages the resolution process. The most common reasons for bank failure include poor management, inadequate capital, or asset-quality problems. The FDIC, as the receiver, is tasked with preserving the critical functions of the bank and ensuring the continuation of the organization during financial distress.

Bank Supervision and Resolution Planning

To prevent bank failures and minimize their impact, the supervisory authorities in the United States focus on proactive supervision and resolution planning. Banks are required to submit resolution plans, also known as “living wills,” detailing how they can be resolved in an orderly manner if they experience financial distress. These plans aim to preserve the critical functions of the bank and ensure the continuation of the organization during times of financial distress. When a bank fails, the resolution authority in the United States, primarily the FDIC, follows a step-by-step process to resolve the failed institution. This includes:

  • Appointment of the FDIC as the receiver.
  • Liquidation or transfer of the bank’s assets and liabilities.
  • Payment of insured deposits through the Deposit Insurance Fund.
  • Resolution of the failed bank through the least-costly method, such as sale ofthe bank’s assets, merger with a healthier institution, or establishment of a bridge bank.

In the United States, various options are available for reorganizing, recapitalizing, restructuring, or dissolving a failed bank. Some of these options include (1) sale of the Business (the failed bank’s assets, liabilities, and operations can be sold to a third party, often another financial institution); (2) a bridge Bank (a temporary bank can be established by the FDIC to maintain essential banking services and facilitate the orderly transfer of assets and liabilities to a healthier institution); and (3) asset Separation (the failed bank’s assets can be separated into good and bad assets, with the good assets being transferred to a healthier institution and the bad assets being managed separately for liquidation).

Protecting Account Deposits and Creditor Interests

In the United States, account deposits are protected by the FDIC’s Deposit Insurance Fund, which insures deposits up to $250,000 per depositor. This insurance helps protect depositors in the event of a bank failure. Other creditor interests are also protected, with priority given to secured creditors, followed by unsecured creditors and, finally, shareholders.

The United States has implemented regulations and supervisory measures to ensure that non-viable financial firms exit the market in an orderly manner. These measures include the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandates regular stress testing and enhanced prudential standards for large financial institutions. These tests help identify potential risks and ensure that non-viable firms exit the market without causing systemic disruptions.

Bank Liquidation in the USA

In the USA, the FDIC is responsible for managing the liquidation process of a failed bank. Bank liquidation rules require that the FDIC maximize the return from the sale of the failed bank’s assets, minimize the impact on the Deposit Insurance Fund, and ensure the fair treatment of all claimants.

Understanding the complexities of the US banking system and the processes in place to address bank failures is crucial for international bank creditors. This knowledge enables them to make informed decisions and mitigate the risks associated with USA bank failures. By comprehending the regulatory environment, resolution planning, and legal safeguards for creditors, they can better navigate the financial landscape and protect their interests in the event of a bank failure.