What to watch in valuing banks and other financial services institutions

Michael Krimminger, the chief counsel of the USA's Federal Deposit Insurance Corp., has said that all SIFIs (systemically important financial institutions) need to have workable plans in place for unwinding themselves if necessary, or they might need to restructure. "Ultimately, a SIFI could be required to restructure its operations if it cannot demonstrate it is resolvable in an orderly manner under the Bankruptcy Code," Mr. Krimminger is apparently going to tell a House Financial Services subcommittee.

What he will be telling them is simply the law as it stands at present.

The question is whether the House subcommittee will want to weaken the law by encouraging SIFIs to ignore or evade the law, or whether the subcommittee will seek to have that that provision actually implemented, for example by setting a deadline for all SIFIs to present such "resolution plans" for evaluation.

If the decision is to move in the second and more sensible direction, then the market will watch what plans are presented by which SIFI, or (if the submission is secret - as it should be), which plans pass muster and which do not.

Plans that do not pass muster should mean that the particular SIFI will either have to submit a revised plan that does pass muster, or be required to begin its breakup more or less immediately.

In some cases, a few cases a breakup will reduce the value of the SIFI but in other cases a breakup will increase value in the SIFI, so far as shareholders are concerned. Sphere: Related Content