Goldman Sachs 2015 Annual Report Download - page 26

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
The EU Bank Recovery and Resolution Directive (the
BRRD) required EU member states to grant, by
January 1, 2016, “bail-in” powers to EU resolution
authorities to recapitalize a failing entity by writing down
its unsecured debt or converting its unsecured debt into
equity. Financial institutions in the EU (including GSI) must
provide that new contracts entered into after
January 1, 2016 enable such actions and also amend pre-
existing contracts governed by non-EU law to enable such
actions, when the financial institutions could incur
liabilities under such pre-existing contracts after
January 1, 2016.
Separately, under the BRRD, financial contracts not
governed by EU law are required to be amended so that the
resolution authorities can impose a temporary stay of
termination in resolution. These requirements must be
implemented over 2016 and 2017, with the timing
depending on the category of the counterparty of the
financial institution. The BRRD also subjects investment
firms to MREL so that they can be resolved without causing
financial instability and without recourse to public funds in
the event of a failure. In July 2015, the European Banking
Authority published final draft Regulatory Technical
Standards on MREL, which specify the common criteria
under the BRRD. The Bank of England’s proposal on
MREL is described above under “Total Loss-Absorbing
Capacity.”
Insolvency of an Insured Depository Institution or a
Bank Holding Company. Under the Federal Deposit
Insurance Act of 1950, if the FDIC is appointed as
conservator or receiver for an insured depository institution
such as GS Bank USA, upon its insolvency or in certain
other events, the FDIC has broad powers, including the
power:
‰To transfer any of the depository institution’s assets and
liabilities to a new obligor, including a newly formed
“bridge” bank, without the approval of the depository
institution’s creditors;
‰To enforce the depository institution’s contracts pursuant
to their terms without regard to any provisions triggered
by the appointment of the FDIC in that capacity; or
‰To repudiate or disaffirm any contract or lease to which
the depository institution is a party, the performance of
which is determined by the FDIC to be burdensome and
the disaffirmance or repudiation of which is determined
by the FDIC to promote the orderly administration of the
depository institution.
In addition, under federal law, the claims of holders of
domestic deposit liabilities and certain claims for
administrative expenses against an insured depository
institution would be afforded a priority over other general
unsecured claims, including deposits at non-U.S. branches
and claims of debt holders of the institution, in the
“liquidation or other resolution” of such an institution by
any receiver. As a result, whether or not the FDIC ever
sought to repudiate any debt obligations of GS Bank USA,
the debt holders (other than depositors) would be treated
differently from, and could receive, if anything,
substantially less than, the depositors of GS Bank USA.
The Dodd-Frank Act created a new resolution regime
(known as “orderly liquidation authority”) for bank
holding companies and their affiliates that are systemically
important and certain non-bank financial companies.
Under the orderly liquidation authority, the FDIC may be
appointed as receiver for the systemically important
institution and its failed non-bank subsidiaries if, upon the
recommendation of applicable regulators, the Secretary of
the Treasury determines, among other things, that the
institution is in default or in danger of default, that the
institution’s failure would have serious adverse effects on
the U.S. financial system and that resolution under the
orderly liquidation authority would avoid or mitigate those
effects.
If the FDIC is appointed as receiver under the orderly
liquidation authority, then the powers of the receiver, and
the rights and obligations of creditors and other parties
who have dealt with the institution, would be determined
under the orderly liquidation authority, and not under the
bankruptcy or insolvency law that would otherwise apply.
The powers of the receiver under the orderly liquidation
authority were generally based on the powers of the FDIC
as receiver for depository institutions under the Federal
Deposit Insurance Act. Substantial differences in the rights
of creditors exist between the orderly liquidation authority
and the U.S. Bankruptcy Code, including the right of the
FDIC under the orderly liquidation authority to disregard
the strict priority of creditor claims in some circumstances,
the use of an administrative claims procedure to determine
creditors’ claims (as opposed to the judicial procedure
utilized in bankruptcy proceedings), and the right of the
FDIC to transfer claims to a “bridge” entity. In addition,
the orderly liquidation authority limits the ability of
creditors to enforce certain contractual cross-defaults
against affiliates of the institution in receivership.
14 Goldman Sachs 2015 Form 10-K