Last week, the FDIC Board of Directors approved the establishment of an Office of Complex Financial Institutions, or CFI, as it began executing its obligations under the Dodd-Frank Wall Street Reform and Consumer Protection Act. "The FDIC plans to vigorously implement its new authorities under the Dodd-Frank Act, which ends the presumption of ‘too big to fail', for the largest and most complex financial institutions," said FDIC chair Sheila Bair, in announcing the shift. 

 

Primary among its responsibilities, the CFI will continuously monitor bank holding companies that have more than $100 billion in assets, as well as non-bank financial institutions deemed "systemically important by the new Financial Stability Oversight Council", according to the release. The Financial Stability Oversight Council also was established by the Dodd-Frank bill, and is headed by the Treasury Secretary.

Arthur Murton, currently head of the FDIC's division of insurance and research division, will add the duties of CFI interim head to his responsibilities, says FDIC spokesperson Andrew Gray. At the moment, the agency hasn't announced the number of employees that will be allocated to the CFI.
 
While not all the details have been settled, the move is a step in the right direction, says Gerald Hanweck, professor of finance at George Mason University and a visiting scholar at the FDIC from 2002 to 2007. "It clarifies who will do what" when banks run into trouble, and puts the FDIC right in the middle of the decision-making, Hanweck says.
 
That's as it should be, Hanweck adds, as the FDIC has a better understanding of credit risk than, for instance, the Treasury Department. The FDIC has extensively researched the impact of large bank failures, even though the agency didn't have direct oversight when it came to the enormous bank holding companies that evolved over the past decade or two; its authority was limited to the banks themselves, not the holding companies.   
 
Moreover, because the agency has to pay the bills when a bank runs into trouble, it's been an advocate for higher capital ratios than those proposed in, for instance, Basel III, Hanweck says. The Basel Accords are the set of international banking guidelines developed by the Basel Committee on Banking Supervision, whose Secretariat is located at the Bank for International Settlements.
 
Will the re-org help prevent future financial crises? While that's hard to say, the fact that the FDIC will have a larger role to play in the oversight of financial institutions deemed "too big to fail" is positive. The agency has more incentive than others to reign in excessive risk taking on the part of banks. And, if a bank does fail, the FDIC should be able to establish a more orderly resolution process, and keep the overall financial system functioning more smoothly. Conversely, the handling of both AIG and Bear Stearns involved an "unnecessary hodgepodge of actions", Hanweck says.