4  BIS Review 140/2010  The FDIC has these powers for banks and thrifts as well as a great deal of experience in managing bank failures and has demonstrated the utility and flexibility of its tools. A positive development is that many countries are considering or have adopted legislation giving the financial resolution authority similar powers. The U.S. Dodd-Frank Act passed in the summer broadens the scope of the FDIC’s resolution powers, although in a carefully circumscribed manner. The Dodd-Frank Act allows the FDIC to resolve not only a bank, but a financial holding company of a banking organization or a nonbank financial institution, if the requisite recommendations and conditions are present, among them, that the failure is a threat to financial stability. When the FDIC is appointed receiver, it has available its full set of resolution powers, including the ability to create a bridge company for a nonbank financial institution. The Dodd-Frank Act also strengthens the supervisory regime for systemically important financial firms. It empowers the newly formed Financial Stability Oversight Council (FSOC) to designate bank and nonbank firms as systemically important. The FSOC has just published an advanced notice of proposed rulemaking soliciting comments on the criteria for designating nonbank financial companies systemically important. Companies that are so designated will be subject to consolidated oversight from the Federal Reserve. The U.S. supervisory and resolution authorities have also begun the process of resolution planning, as recommended by the CBRG.
Estimates of unfunded pension liabilities range up to several trillion dollars. While widespread, underfunding of public pensions is not universal. Many states have found ways to keep their public pensions reasonably well funded, demonstrating that pushing today’s costs into the future is not an inevitable outcome of a democratic government. Nonetheless, we have seen evidence that high debt levels combined with diminished services provision can, in cases such as Detroit and Stockton, make the public sector finances unsustainable. At a certain point, the debt service burden clashes with maintaining a sufficient ongoing provision of services to forestall people from voting with their feet. This may occur well before the point that debt service capacity appears to be fully exhausted. In other words, the prioritization of cash flows to debt service may not be sustainable beyond a certain point. While these particular bankruptcy filings have captured a considerable amount  2  BIS central bankers’ speeches  of attention, and rightly so, they may foreshadow more widespread problems than what might be implied by current bond ratings. We need to focus our attention today on addressing the underlying issues before any problems grow to the point where bankruptcy becomes the only viable option. So, I am especially pleased to see that your agenda today focuses, in part, on helping cities and states avoid such levels of fiscal stress, where the risks of going past such a tipping point become significant. In summary, state and local governments have enormous financial obligations, as well as critical service delivery responsibilities.