FRB, FDIC issue resolution planning guidance, one-year extension to four FBOs; Issue evaluation of 16 US BHC resolution plans

On March 24, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC)1 (collectively, the “agencies”) issued guidance to four foreign banking organizations (FBOs) for their next resolution planning submissions (the “2018 Guidance”) and announced credibility determinations for 16 resolution plans submitted by US bank holding companies (BHCs) in 2015.2

Notably, the agencies extended—from July 1, 2017 to July 1, 2018—the date by which the FBOs must submit their next resolution plans, but did not release credibility determinations for the FBOs’ 2015 resolution plans.

The agencies did not identify deficiencies in any of the plans submitted by the 16 US BHCs, but did identify shortcomings in one of the plans.

For a more detailed analysis of the credibility determinations for the resolution plans submitted by the 16 US BHCs, please click here.

Key takeaways for FBOs

For the four FBOs in the FRB’s Large Institution Supervision Coordinating Committee (LISCC) portfolio—Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, and UBS AG—the agencies provided guidance on key areas, including capital, liquidity, governance, operational capabilities, branches, the group resolution plan, legal entity rationalization and separability, derivatives and trading activities, and the public section of the plan.

  • The 2018 Guidance is generally consistent with the guidance previously issued to the eight US global systemically important banks (G-SIBs) (the “2017 Guidance”).3
  • As expected, the 2018 Guidance adds certain new features and addresses issues unique to FBOs (e.g., sections on the FBOs’ US branches and group resolution plans); the other seven sections are the same as the 2017 Guidance.
  • There are certain new items that may also be of interest to the US G-SIBs.
  • The agencies recognize the possibility of parent liquidity support for FBOs’ intermediate holding companies (IHCs) in resolution given sufficient analysis and justification.
  • Importantly, the agencies directly incorporated Supervision and Regulation (SR) Letter 14-1 (Principles and Practices for Recovery and Resolution Preparedness)4 into the 2018 Guidance, formally directing FBOs to take into account the expectations outlined in SR 14-1—originally issued to the eight US G-SIBs—for the first time, with an increased focus on capabilities.
  • The agencies are directly challenging the feasibility of placing broker-dealers into a Securities Investor Protection Act (SIPA) resolution without disrupting the financial system, raising the bar on evidence that it could be done in an orderly fashion. This expectation presumably sets a new bar for both US BHCs and FBOs.
  • With respect to the liquidity analysis, there is a new warning not to consider excess liquidity in insured depositories as movable per Regulation W. This expectation could apply to US BHCs as well.
  • The agencies’ thinking on shared services continuity has evolved further, and there is new guidance in this area, including:
    • A more explicit expectation to consider regulatory impediments to the delivery of shared services, particularly if they relate to foreign jurisdictions (this would appear to be a new elaboration that US BHCs should be attentive to as well);
    • A new expectation that working capital be held in a form that ensured its availability; and
    • More specific language on analyzing continuity of operations than in the 2017 Guidance.
  • There is a new section on qualified financial contracts (QFCs), which is presumably also applicable to US BHCs.
  • The section on branches, which only applies to the FBOs, includes key expectations, including:
    • Mapping financial and operational interconnections among branches, core business lines, critical operations, and material entities; and
    • A requirement to analyze the effect on critical operations should a significant branch cease to operate, even if the branch is not part of the FBO’s preferred resolution strategy in the US.
  • The US G-SIBs have benefited from office hours meetings with the FRB and FDIC, during which they were able to discuss questions and receive direct feedback from the regulators. Although the FBOs have not received written feedback and are not expected to receive oral feedback, they could use the written feedback to the US BHCs as an indication of regulatory expectations.

There is now an increased expectation for capabilities established through the build out of the governance, risk management, capital, and liquidity stress testing capabilities that may need to be further extended to meet the 2018 Guidance.

Next steps

The four LISCC FBOs should assess their previous resolution planning submissions and analyze the 2018 Guidance to determine what changes they may need to make. In addition, these FBOs should carefully review the identified shortcomings and deficiencies among US BHCs and seek to avoid similar issues in these areas.

Finally, institutions should continue to communicate with the FRB and FDIC to determine that the strategies implemented are in line with regulatory expectations as they prepare to submit their next resolution plans.

As further developments occur, Deloitte will issue additional updates as appropriate.

Author:

Marlo Karp
Partner | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

David Wright
Manging Director| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

John Corston
Independent Senior Advisor to Deloitte & Touche LLP

Mony Liquard
Senior Manager| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Stuart Shroff
Manager| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Brandon Sternberg
Manager| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, “Agencies complete resolution plan evaluation of 16 domestic firms; provide resolution plan guidance to four foreign banking organizations,” (March 24, 2017), available here.
2On August 2, 2016, the FRB and FDIC extended, from December 31, 2016 to December 31, 2017, the deadline for these 16 US BHCs—as well as 20 FBOs and two nonbank financial companies designated by the Financial Stability Oversight Council for enhanced supervision by the FRB—to file their next resolution plans. See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, “Agencies extend deadline for 38 resolution plan submissions,” (August 2, 2016), available here.
3Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, “Agencies announce determinations and provide feedback on resolution plans of eight systemically important, domestic banking institutions,” (April 13, 2016), available here.
4Board of Governors of the Federal Reserve System, “Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies – Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR letter 12-17/CA letter 12-14)”, (January 24, 2014), available here.

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