The largest U.S. banks would have to come up with plans for regulators to dismantle them in times of severe distress, under a new rule proposed by the Federal Deposit Insurance Corp on Tuesday.

The FDIC also formally proposed, by a split vote, to give federal protection to securitizations backed by home loans and other consumer debt, if they meet higher standards and banks retain some of the risk associated with the products.

Two regulators on the five-member FDIC board voted against the proposal, saying it could create an uneven playing field because it only applies to securitizations by banks, not other financial firms.

The proposals are aimed at reforming two key drivers of the recent financial crisis -- the perception that some financial firms are too big to fail, and the repackaging of shoddy loans into securities that put risk throughout the financial system.

The FDIC proposals complement measures being considered in Congress as part of a larger effort to rewrite the rules for financial markets and firms.

In one rule, the FDIC proposed that about 40 of the nation's largest deposit-taking banks submit to regulators what amounts to a living will.

The submission would include analysis and plans that show the insured depository bank's ability to be separated from its parent company and be wound down in an orderly fashion.

It would apply to depository banks with more than $10 billion in assets that are part of a larger holding company with more than $100 billion in assets.

FDIC officials said their proposal would dovetail with a Congressional proposal that would require the largest financial firms to submit living wills. That reform is designed to reduce the impression that some firms are too big to fail.

It is a very real problem we saw in the crisis, FDIC Chairman Sheila Bair said about the too big to fail problem.

The FDIC's proposal would not apply to large bank holding companies, just to the deposit-taking banking unit.


The securitization measure is designed to restart the more than $11 trillion market after it virtually froze during the financial crisis, by giving investors confidence that the financial products are sound.

Under the proposal, The FDIC would provide banks with safe harbor protection for securitizations if banks met higher loan origination standards and retained 5 percent ownership interests in the loans.

It would also require more disclosure of the underlying loans and long-term pay for the credit rating agencies rating the asset-backed securities.

Securitizations that met those standards would be protected from seizure if a bank failed.

We would like to see the securitization market come back, but in the right way, not the wrong way, Bair said.

The Securities and Exchange Commission has also been trying to restore confidence in the securitization market.

Last month it proposed that issues of mortgage-backed securities and similar instruments disclose more about the underlying loans and keep 5 percent credit risk in some circumstances.

The American Securitization Forum said it is encouraged the FDIC and SEC are working closely together on their proposal. But the group said it is troubled that the FDIC could create uncertainty for investors about whether a safe harbor has been achieved.

Investors need a clear bright line which establishes application of the safe harbor, thereby providing them the certainty to invest in new securitizations and generating sorely needed credit to American businesses and consumers, the ASF said in a statement.

Comptroller of the Currency John Dugan voted against the securitization proposal, saying Congress is working on a comprehensive reform measure, and the FDIC should not exert new rules on just a slice of the market.

John Bowman, acting director of the Office of Thrift Supervision, also voted against the proposal. He voiced concerns about the patchwork of securitization reforms across Congress and regulators.

The rules would be voluntary, but regulators hope banks will follow them because the protection and higher standards could mean better credit ratings and prices for the securitizations.

(Reporting by Karey Wutkowski; Editing by Andrea Ricci, Tim Dobbyn and Bernard Orr)