Posted by Marlo Karp, Deloitte Advisory Partner on April 15, 2016.
On April 13, 2016, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) announced credibility determinations and released firm-specific feedback on the 2015 resolution plans submitted by eight US global systemically important banks (G-SIBs) under Section 165(d) of Dodd-Frank.
In conjunction with this announcement, the FRB and FDIC released guidance for the next full plan submissions for these eight US G-SIBs, which are due by July 1, 2017.
The agencies jointly determined that the plans submitted by five G-SIBs were “not credible or would not facilitate an order resolution under the Bankruptcy Code.” The firms must remediate the deficiencies by October 1, 2016, or they “may be subject to more stringent prudential requirements.”
In addition, the agencies jointly identified weaknesses in the plans submitted by two institutions, although they did not make joint determinations regarding the credibility of these plans. (The FDIC found that one institution’s plan was “not credible” but the FRB did not reach this conclusion, while the FRB found that the other institution’s plan was “not credible” but the FDIC did not reach this conclusion.)
Only one institution had a plan where neither the FRB nor FDIC found that the plan submitted was “not credible,” though both agencies identified certain shortcomings with the plan.
These three firms that were not jointly deemed to have deficient plans must address shortcomings and new supervisory guidance in their next full plan submissions, which are due by July 1, 2017 (they must also submit status reports by October 1, 2016).
The FRB and FDIC are continuing to assess the 2015 plan submissions of four foreign banking organizations.
In a statement accompanying the announcement, FDIC Vice Chairman Tom Hoenig expressed support for the credibility determinations and emphasized his belief that “no firm yet shows itself capable of being resolved in an order fashion through bankruptcy.”1
He maintained that weaknesses vary by firm and include (1) how to determine when to enter bankruptcy, (2) how the resolution strategy aligns with bankruptcy court processes, (3) whether there is adequate liquidity and debtor-in-possession financing, and (4) how a firm would pass capital to operating units in anticipation of bankruptcy.
In addition, he argued that, although the resolution planning process assumes that an individual G-SIB would be able to withstand the effect from the failure of another G-SIB, this assumption is “unrealistic,” contending that there is a “legitimate question as to whether these firms individually and thus collectively have sufficient equity capital to withstand the shock of even a single G-SIB failure.”
The feedback from the FRB and FDIC demonstrates that regulators have significantly raised their expectations with respect to resolution planning.
Although the agencies acknowledged that important changes have been made to the structure and operations of the largest firms that may improve resolvability, they believe these firms have fallen short strategically and operationally at overcoming resolvability issues, and feel that significant work remains.
The most significant weaknesses identified are related to liquidity, derivatives and trading, governance, operational continuity, legal entity rationalization, and measuring and positioning capital for an orderly resolution. The agencies expect all firms to be aggressive in their actions to improve their 2017 submissions.
It is important to note that the agencies’ evaluations are based on the state of resolution plans and readiness from more than nine months ago. The industry has continued to make improvements and has a head start in some areas of noted shortcomings and deficiencies.
What does this mean for institutions?
In response to the resolution plan feedback, all US G-SIBs should understand where they stand relative to their peers in order to gauge regulatory expectations.
In addition, they should assess the actions taken since the submission of their 2015 plans in light of the agencies’ feedback to determine whether their firm is on the right track.
If a firm has a deficiency, a strong firm-wide response should be developed that maximizes chances for success. However, even if a firm does not have a deficiency but has a shortcoming, it should not interpret that finding as acceptable and should continue to make improvements; the firm should not delay work just because the applicable deadline now falls in 2017.
Management should be proactive in responding to findings of shortcomings and deficiencies and take steps so that regulatory concerns do not continue to be elevated.
Finally, firms should continue to communicate with the agencies to determine that strategies implemented are in line with regulatory expectations.
For more information regarding the resolution plan feedback, refer to our analysis here.
1FDIC Board Meeting Statement of Vice Chairman Thomas M. Hoenig regarding 2015 Title I plans submitted by the eight domestic GSIBs, available at https://fdic.gov/news/news/speeches/spapr1316a.html