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On July 2, the Federal Reserve Board and the FDIC announced that the deadline to file resolution plans, also known as living wills, for 14 domestic firms has been extended to December 31, 2019. This one-year extension provides more time for the agencies to provide feedback on the firms’ last round of resolution plan submissions, as well as for the firms to produce their next resolution plans as required by the Dodd-Frank Act. The agencies also issued a reminder that due to the recent passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, banks with less than $100 billion in total consolidated assets are no longer bound by resolution plan requirements.
On June 29, the FDIC and Federal Reserve issued (here and here) a joint request for public comment on proposed revisions to resolution plan guidance for the eight largest and most complex U.S. banks. Resolution plans, also known as living wills, outline a bank’s strategy for rapid and orderly resolution under bankruptcy in the event of material financial distress or failure of the company, and help to reduce the risk that a bank’s failure will cause serious adverse effects on the financial stability of the U.S. The proposed guidance would apply beginning with the July 1, 2019 resolution plan submissions. The proposed guidance also would incorporate agency expectations for addressing derivatives, trading, payment, clearing, and settlement activities. The FDIC and Federal Reserve will accept comments on the proposed guidance for 60 days following publication in the Federal Register.
FDIC releases 2017 annual report, among key issues are living wills, cybersecurity, and simplifying regulations
On February 15, the FDIC released its 2017 Annual Report, which includes, among other things, the audited financial statements of the Deposit Insurance Fund and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund. The report also provides an overview of key FDIC initiatives, performance results, and other aspects of FDIC operations, supervision developments, and regulatory enforcement, including the following:
- Living Wills. The report discusses the FDIC’s continued evaluation of resolution plans for Systemically Important Financial Institutions (SIFIs) and notes there remain “inherent challenges and uncertainties” associated with the plans, specifically within four areas: “intra-group liquidity; internal loss-absorbing capacity; derivatives; and payment, clearing, and settlement activities.” Further, the FDIC and Federal Reserve (who share joint responsibility for reviewing and assessing resolution plans) reviewed plans submitted by the eight largest U.S. SIFIs and noted that four of the firms’ plans had shortcomings—although no deficiencies were identified—and stipulated that the plans must be resubmitted by July 1, 2019. (See previous InfoBytes coverage here on recent comments by FDIC Chairman Martin concerning living will challenges.)
- Cybersecurity. Among other initiatives, the report discusses a collaboration between the FDIC, the Federal Reserve, and the OCC to update the interagency Cybersecurity Assessment Tool, which “helps financial institutions determine their cyber risk profile, inherent risks, and level of cybersecurity preparedness.” The report provides feedback from institutions currently using the tool.
- Simplifying Regulation. In accordance with the requirements of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), the report discusses the FDIC’s, Federal Reserve Board’s, and OCC’s regulatory review process done in conjunction with the National Credit Union Administration and the members of the Federal Financial Institutions Examination Council (FFIEC). As previously covered in InfoBytes here and here, a report was issued in March outlining initiatives designed to reduce regulatory burdens, particularly on community banks and savings associations, and last September a proposed rule to simplify capital rule compliance requirements and reduce the regulatory burden was issued.
On February 16, FDIC Chairman, Martin J. Gruenberg, spoke at an event hosted by The Wharton School in Philadelphia about the challenges associated with managing the orderly failure of a systemically important financial institution. In prepared remarks, Gruenberg discussed his views on how the FDIC’s Title II Orderly Liquidation Authority granted under Dodd-Frank—which allows the regulator “to manage the orderly failure of any financial institution whose failure in bankruptcy could pose a risk to the financial system”—is complementary to the Title I living will process. Title I requires firms to “make significant changes in their organizational structure and operations to facilitate orderly failure in bankruptcy.” Gruenberg outlined the evolution of the living will process from its inception under Dodd-Frank in 2010, to the efforts undertaken by the eight largest, most complex banks when assembling their mandated resolution plans, which are reviewed by the FDIC and the Federal Reserve (the agencies). While the banks have demonstrated “substantial” progress on their resolution plans, Gruenberg commented “there is still a great deal of work to do.” Specifically, Gruenberg noted that in 2016, the agencies determined that (i) five of the eight submitted plans “would not facilitate an orderly resolution of the firm under the Bankruptcy Code,” and (ii) all eight plans contained “shortcomings” that raised questions about the plans’ feasibility. All systematically important financial institutions were directed to address their shortcomings in their next submissions. During his remarks, Gruenberg cited examples of progress made in 2017, and highlighted the “structural and operational improvements” firms have made to improve resolvability. However, he closed his remarks by noting these resolutions have not yet been tested and emphasized the need to continue to address challenges as they arise.
On January 29, the Federal Reserve Board and the FDIC sent letters to 19 foreign banks operating in the United States to outline and clarify resolution plan expectations. According to a joint release issued by the regulators, Dodd-Frank-mandated resolution plans—commonly known as living wills—require certain foreign banks to detail strategic plans for their U.S. operations “for rapid and orderly resolution under bankruptcy” should the banks fail or fall under material financial distress. Requested in the letters, among other things, are specifics on resolution strategies, capital calculations, management of liquidity, stress testing, and organizational structures. Banks are required to submit 2018 resolution plans no later than December 31, 2018. Refer here to access a list of banks and letters.
Earlier this week, the Treasury Department announced that on Monday, May 8, Secretary Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury Department press release, the preliminary agenda includes:
- a discussion of the April 21 Presidential Memorandum on Council designations;
- an update on the annual reevaluation of the designation of a nonbank financial company;
- a discussion of interagency regulatory collaboration and the Feb. 3 Executive Order on core principles for financial regulation;
- a discussion of the FSOC’s 2017 Annual Report; and
- an update on bank holding companies’ living wills and resolution planning.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and/or can be viewed after it occurs. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards.
Meeting minutes for past Council meetings are available here.
Readouts for past Council meetings are available here.
On March 3, Federal Reserve Chair Janet Yellen delivered remarks to the Citizens Budget Commission regarding actions that the Federal Reserve has taken to strengthen its supervision of large financial institutions in the wake of the recent financial crisis. In her remarks, Chairwoman Yellen highlighted five regulatory changes, including (i) higher capital standards, (ii) higher liquidity requirements, (iii) implementation of stress tests, (iv) required submission of living wills, and (v) in cooperation with the FSOC, the Fed’s enhanced authority to promote the resiliency and stability of the financial system in addition to the safety and soundness of individual institutions.
On January 15, the Federal Reserve and the FDIC issued a joint press release making available the public sections of resolution plans of firms with less than $100 billion in qualifying nonbank assets. The Dodd-Frank Act requires that certain banking institutions periodically submit resolution plans to the Federal Reserve and the FDIC describing the bank’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company. The public portions of these “living wills” are available on the Federal Reserve and FDIC websites.
On February 2, Panasonic Corporation disclosed that U.S. subsidiary Panasonic Avionics was being investigated by the DOJ and SEC for possible violations of the FCPA and other related laws. According to its press release, Panasonic is cooperating in the investigation and recently began settlement discussions with both agencies. The countries at issue in the investigation have not been disclosed.
Although Panasonic had not spoken publicly about the probe until this week, the Wall Street Journal first reported the investigation in 2013. Panasonic Avionics makes in-flight entertainment and communication systems for airlines.
On January 17, the FDIC approved a final rule establishing the requirements for submission and content of plans to assist the FDIC in the orderly resolution of insured depository institutions with total assets of at least $50 billion. The rule aims to help mitigate risks presented by insolvency of large and complex institutions by enhancing the FDIC’s ability to reduce losses to the Deposit Insurance Fund and limit disruption to the broader financial system. The $50 billion asset threshold means that thirty-seven institutions currently will be required to submit resolution plans (also known as “living wills”). This final rule follows and amends an interim final rule published in September 2011 (see InfoBytes, September 23, 2011). Some amendments are designed to more closely align the rule with a similar rule issued jointly by FDIC and the Federal Reserve Board in October 2011 to require resolution plans for certain bank holding companies. (See InfoBytes, October 21, 2011). Other changes to the interim final rule address comments submitted by stakeholders, including changes to (i) require plans to identify potential barriers or other material obstacles to an orderly resolution, (ii) allow for recapitalization as a resolution option, and (iii) require the FDIC in its plan review process to consult with a covered institution’s regulator before finding that an institution’s data production capability is unacceptable. Resolution plans will be submitted in phases to address the largest institutions first. For example, the first phase requires covered institutions whose parent company had at least $250 billion of nonbank assets as of November 30, 2011 to submit plans on July 1, 2012. Each covered institution must submit plans annually on the anniversary date of their initial submission.