FRB, FDIC issue feedback on 2017 US G-SIB resolution plans, find no deficiencies

On December 19, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) announced credibility determinations and released firm-specific feedback on the 2017 resolution plans submitted by the eight US global systemically important banks (G-SIBs) under Section 165(d) of Dodd-Frank.1

Notably, the agencies announced that none of the plans had deficiencies,2 which reflects the “significant progress made in recent years.”

However, the agencies found that four of the plans had shortcomings3 related to derivatives and trading activities, separability, and legal entity rationalization (each plan had a single shortcoming).  In addition, the agencies identified four areas in which “more work needs to be done by all firms to continue to improve their resolvability”:

  1. intra-group liquidity,
  2. internal loss-absorbing capacity,
  3. derivatives, and
  4. payment, clearing, and settlement activities.

The agencies also expect firms to “remain vigilant in considering the resolution consequences of their day-to-day management decisions.”

Key takeaways

The feedback from the agencies indicates that firms have made notable progress in enhancing their resolvability.  By contrast, the last time the agencies provided feedback to the US G-SIBs on their full resolution plans (April 2016), they determined that five of the eight plans had deficiencies, and the three plans without deficiencies each had multiple shortcomings.

However, the agencies continue to expect progress with respect to resolution planning, including in the four specific areas they identified.  Given these high supervisory expectations, firms should continue to be proactive in enhancing their resolvability and resolution capabilities.

Recognition of industry progress

The FRB and FDIC provided notable details on firms’ progress since submitting their last resolution plans.  Specifically, the letters contain a section on “Progress Made,” which emphasizes that all firms have begun to implement rules regarding total loss-absorbing capacity, clean holding companies, and stays of qualified financial contracts.

The section also identifies firm-specific progress.  In comparing the feedback across firms, there are eight areas of common progress:

  1. improving capital and liquidity capabilities by developing approaches to estimate stand-alone financial resource needs for each material entity,
  2. linking measures of estimates financial resource needs to available resources to inform the timely filing of the parent company’s bankruptcy,
  3. developing a framework for the pre-positioning of capital and liquidity at material entities,
  4. entering into a contractually binding mechanism designed to provide capital and liquidity support to material entities,
  5. creating a framework to govern escalation of information in support of timely decision-making,
  6. modifying its service contracts with key vendors to include provisions intended to ensure the continuation of services,
  7. pre-positioning working capital in service-providing entities, and
  8. developing playbooks to support continued access to payment, clearing, and settlement activities.

Beyond those common areas of progress, the individual feedback letters note a range of other firm-specific actions taken since the last resolution planning submission.

The journey continues

Although the positive feedback indicates that the FRB and FDIC believe firms have taken important steps with respect to resolution planning, the accomplishments listed are specific to actions taken since the submission of the 2016 resolution plans, and do not necessarily reflect other earlier accomplishments.  Accordingly, a firm with a longer list of recent achievements should not necessarily conclude that it is better prepared than a firm with a shorter list.

In addition, given the emphasis that firms should continue to develop capabilities regarding intra-group liquidity, internal loss-absorbing capacity, derivatives, and payment, clearing, and settlement activities, supervisory expectations are likely to remain high.

Next steps

The US G-SIBs must submit their next resolution plans by July 1, 2019.

In the interim, the agencies noted that they will “continue to explore ways to improve the resolution planning process and are considering extending the cycle for resolution plan submissions from annual to once every two years, reflecting the agencies’ experience regarding the time needed to prepare and review the plans.”

However, the letters were less specific than the public feedback letters on the firms’ last resolution plans, suggesting that the agencies may provide firms more direct feedback in advance of their next submissions.  If specific questions arise, firms should continue to communicate with the agencies to determine whether their approaches are consistent with regulatory expectations.

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

Organizations may contact Deloitte with questions about the changes and activities to support planning, preparation, and compliance.

Contacts

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

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

John Corston
Independent Senior Advisor to Deloitte & Touche LLP

Joe Fellerman
Independent Senior Advisor to Deloitte & Touche LLP

Chris Spoth
Managing Director | Deloitte Risk and Financial Advisory
Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

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

1Board of Governors of the Federal Reserve System, “Agencies announce joint determinations for living wills,” (December 19, 2017), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171219a.htm.
2A “deficiency” is a joint determination by the FRB and FDIC that a resolution plan is “not credible or would not facilitate an orderly resolution under the US Bankruptcy Code.” Such a determination would require the company to resubmit the plan with revisions demonstrating that it is credible and would result in an orderly resolution under the US Bankruptcy Code. Failure to resubmit a credible plan could result in the imposition of more stringent capital, leverage or liquidity requirements, or restrictions on the growth, activities, or operations of the company until it resubmits a plan that remedies the deficiency.
3A “shortcoming” is a weakness identified by the FRB and FDIC that is not considered a deficiency, but raises questions about the feasibility of the plan.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see http://www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2017 Deloitte Development LLC. All rights reserved.

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