FRB, FDIC provide resolution plan feedback to 19 FBOs, tailor supervisory expectations

On August 8, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) extended, from December 31, 2017 to December 31, 2018, the resolution plan deadline for 21 firms, including 19 foreign banking organizations (FBOs).

On January 29, 2018, the agencies issued firm-specific feedback to these 19 FBOs based on their last resolution plans filed in 2015.1 Although the feedback letters do not identify any deficiencies or shortcomings with respect to the 2015 plans,2 they outline key supervisory expectations that must be met as the FBOs prepare to file their next plans.

FBOs with US IHCs

Eight of the 19 FBOs were required to establish US intermediate holding companies (IHCs) as of July 1, 2016.3 Accordingly, these FBOs are required to describe any changes they have made to their resolution plan resulting from the implementation of the IHC requirement.

In addition, the agencies jointly determined that the executive summary and strategic analysis of the 2018 plans for these companies “may be limited to any content that has changed” relative to the 2015 plans.  The agencies require the 2018 plans to discuss material changes to (1) the firms’ resolution strategies, (2) the funding, liquidity, and capital needs of, and the resources available to, the companies and their material entities, and (3) the provisions for continuity of shared and outsources services following a bankruptcy filing by the US IHCs.  The companies are also expected to discuss actions they have taken since 2015 to improve the plans’ effectiveness or remediate any material weaknesses or impediments to effective and timely execution of the plans.

The agencies specify that the 2018 plans should assume that the Dodd-Frank Act Stress Test (DFAST) severely adverse scenario for Q1 2018 is the domestic and international economic environment at the time of entry into resolution and throughout the resolution process.

Three focus areas

Below are three focus areas across the feedback letters to the eight FBOs with US IHCs:

  • Shared Services – The agencies require three FBOs to discuss how they will provide for the continuity of shared services that support their critical operations conducted in whole or in material part in the US by “identifying and supporting any assumptions that services provided by the foreign parent, affiliates, or third parties that are required under the US resolution strategy will continue after implementation of the strategy.”
  • Material entities – For two FBOs, the agencies note that, if they continue to treat certain subsidiaries as non-material entities, their 2018 plans “should include an explanation” as to why the entities do not meet the definition of material entity under the resolution plan rule.
  • Repurchase agreements – For one FBO, the agencies note that the 2015 plan assumes counterparties will terminate their outstanding trades upon the company’s failure and will liquidate their collateral with minimal market impact.  If the 2018 plan continues to rely on this assumption, the agencies require the company to “strengthen its support for this assumption” by providing an analysis of (1) the current level of contractual netting, (2) the extent to which the underlying collateral has been re-hypothecated, (3) whether the Securities Investor Protection Corporation Trustee has the authority to stay contracts, and (4) the residual effect of the mismatched gross position on the market and critical operations.

All FBOs with US IHCs—even those for which these areas were not explicitly identified—should review their resolution plans with a focus on whether their strategies and assumptions are in line with these supervisory expectations.

Reduced plans for smaller FBOs

Notably, in an effort to further tailor expectations for smaller firms, the agencies jointly determined that 11 of the 19 FBOs may submit “reduced plans.”

Specifically, these firms are only required to describe:

  • material changes to their resolution plans compared to those submitted in 2015,
  • actions they have taken since 2015 to improve the plans’ effectiveness or remediate any material weaknesses or impediments to effective and timely execution of the plans, and
  • strategies for ensuring that any insured depository institution subsidiary will be adequately protected from risks arising from the activities of any nonbank subsidiaries.

The ability for these 11 FBOs to file reduced plans is contingent on two conditions:  (1) maintaining total US non-branch assets below $50 billion and (2) the absence of a “material event.”  If an FBO no longer satisfies either of these conditions, it must comply with all resolution planning requirements.

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

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

Joe Fellerman
Independent Senior Advisor to Deloitte & Touche LLP
Deloitte & Touche LLP

John Corston
Independent Senior Advisor to Deloitte & Touche LLP
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 complete assessment of resolution plans of 19 foreign-based banks,” (January 30, 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180129a.htm.
2A “deficiency” is a joint determination by the agencies that a resolution plan is “not credible or would not facilitate an orderly resolution under the US Bankruptcy Code,” and a “shortcoming” is a weakness identified by the agencies that is not considered a deficiency, but raises questions about the feasibility of the plan.
3The four FBOs in the Large Institution Supervision Coordinating Committee (LISCC) portfolio are not included in this group, as they received specific guidance outlining heightened supervisory expectations in March 2017.  Our analysis of that guidance is available at https://regpulseblog.com/2017/03/31/frb-fdic-issue-resolution-planning-guidance-one-year-extension-to-four-fbos-issue-evaluation-of-16-us-bhc-resolution-plans/.

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 © 2018 Deloitte Development LLC. All rights reserved.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s