On July 5, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) released the public sections of the 2017 resolution plans submitted by all eight US global systemically important banks (G-SIBs).1 The 2017 public sections are substantially longer than the 2015 public sections submitted in connection with the firms’ last full submissions—863 pages in 2017 compared to 520 pages in 2015—and contain significant new details about the G-SIBs’ completed and forthcoming enhancements to resolution planning capabilities to address regulatory concerns.
The 2017 plans were submitted after the FRB and FDIC (collectively, the “Agencies”) jointly determined that the 2015 plans submitted by five of the eight G-SIBs were “not credible or would not facilitate an order resolution under the Bankruptcy Code.”2 (After the firms submitted remediation plans, the Agencies jointly determined that the firms had adequately remediated the identified deficiencies.) The 2017 public sections make clear that the G-SIBs have benefitted from the Agencies’ increased transparency across the key resolution planning capabilities, as the institutions have demonstrated significant improvements in each of these areas.
Although the Agencies have not yet reviewed either the confidential or public portion of the 2017 plans, the findings related to the 2015 plans illustrate the heightened expectations with respect to resolution planning. If the Agencies determine that a plan is “not credible” and the firm does not remediate an identified deficiency, they may impose more stringent capital, leverage, or liquidity requirements, or restrictions on the firm’s growth, activities, or operations until it submits a plan that remediates the deficiency.
The next full plan submissions for all eight US G-SIBs are due by July 1, 2018.
For a more detailed analysis of the public sections, please click here.
Key takeaways from public sections
In response to the regulators’ feedback on the 2015 resolution plans and remediation plans submitted in 2016, the firms made important changes to their resolution plans intended to improve resolvability.
Below are some key takeaways across the six key resolution planning capabilities.
In response to the Agencies’ guidance for the G-SIBs’ 2017 resolution plans, firms stated that they have sufficient Resolution Capital Adequacy and Positioning (RCAP) and Resolution Capital Execution Need (RCEN), and have incorporated specific capital metric thresholds that—when breached—trigger actions, notifications, and reporting protocols along their crisis continuum. Four firms specifically stated the ability to calculate RCAP and RCEN needs on a daily basis.
Four firms also stated that they are currently exceeding the 2019 requirements related to total loss-absorbing capacity (TLAC), and two firms stated that they are on track to comply by 2019.
Notably, all firms indicated that they have sufficient Resolution Adequacy and Positioning (RLAP) and Resolution Liquidity Execution Need (RLEN), and most firms indicated the ability to both produce RLAP estimates on a daily basis and conduct an RLAP estimate over a 30-day stress scenario.
In addition, three firms reported a Liquidity Coverage Ratio (LCR) above 100%.
With respect to governance mechanisms, firms reported that they have developed trigger and escalation frameworks to guide the timely execution of these mechanisms, as well as governance playbooks that define certain decision-making processes by the boards, executives, and other governing bodies during a resolution scenario.
Below are some key takeaways across four areas of operational capabilities.
Payment, clearing and settlement activities
The firms performed qualitative and quantitative analysis to identify material financial market utilities (FMUs) and agent banks, including analyzing volume and value data for each FMU, and developed FMU contingency playbooks with actionable steps to allow for continued access during resolution.
Managing, identifying, and valuing collateral
All firms now have a comprehensive collateral management policy, and many firms added the capability to identify legal and operational differences and potential challenges in managing collateral within specific jurisdictions, agreement types, and different forms, among other things.
Management information systems
The firms now have the capabilities to provide data to support risk management practices and reporting, which could facilitate decision-making under business-as-usual and stressed conditions.
In addition, most firms indicated the ability to produce resolution-critical contracts and their terms in a timely manner. Further, half of the firms described the ability to maintain and analyze interconnections between and among legal entities, core business lines, critical operations, and critical services.
Shared and outsourced services
All firms have incorporated the agency guidance to establish formalized mapping procedures for identifying critical service, third-party, and asset relationships.
Legal entity rationalization (LER) and separability
The majority of firms established an annual review to ensure ongoing compliance to LER criteria and review of potential changes to the criteria, and developed playbooks to ensure transaction execution is actionable on short notice and during periods of stress.
Derivatives and trading activities
Most firms are using preferred and active wind-down strategy methods to wind-down their derivatives portfolio in case of financial distress, and have built capabilities to track and monitor risk associated with derivatives trading, including on a legal entity basis, to ensure the firm has the operational capacity to transfer prime brokerage accounts to other prime brokers in an orderly fashion during periods of financial distress.
Although the Agencies have not yet reviewed the plans, the firms should not wait for regulatory feedback before assessing their completed and planned actions and identifying areas for improvement. As part of this process, firms should benchmark their strategy, approach, and capabilities against those presented in the other public sections and consider whether others have identified more efficient, simpler, or better approaches to various aspects of resolution planning.
In addition, senior management should continue to focus on resolution planning to avoid shortcomings and deficiencies in the future.
Finally, firms should continue to communicate with the Agencies to determine whether strategies implemented are in line with regulatory expectations as they prepare to submit their next full plans by July 1, 2018.
1 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, “Agencies post public sections of resolution plans; announce deadline extension for two non-bank financial firms,” (July 5, 2017), available at Agencies post public sections of resolution plans; announce deadline extension for two non-bank financial firms.
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