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OCC’s Hsu discusses large bank resolvability
On April 1, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the University of Pennsylvania Wharton School of Business focusing on financial stability and large bank resolvability. In his remarks, Hsu described gaps in resolvability for the largest non-global systemically important banks, potential solutions, and the subsequent effect on financial stability. Hsu stated that he has been involved in every “systemically important” financial stability event since 2008, and that the dangers posed by too-big-to-fail firms “are not a theoretical matter” to him. While the resolvability of the eight global systemically important banks (GSIB) is “logica[lly]” regulated under Title I of the Dodd-Frank Act, Hsu warned that the largest non-GSIB banks are not subject to these "heightened standards.” Hsu pointed out that the four largest non-GSIB banks have total consolidated assets greater than $500 billion, and questioned that “if one were to fail, how would it be resolved?” Noting that the likely resolution would be the absorption of the failing non-GSIB bank by one of the GSIBs, Hsu stated that this is not a “terrible outcome” from a “traditional financial stability perspective.” However, “a GSIB would be forced through a shotgun marriage to be made significantly more systemic, with minimal due diligence and limited identification of integration challenges, which for firms of this size are significant,” he stated. Hsu advocated for utilizing a “single-point-of-entry,” which is the same strategy to which GSIBs are currently subject under their resolution planning framework. Hsu explained that with this approach, “only the parent holding company is supposed to file for bankruptcy or be taken into receivership; all of the material subsidiaries are expected to continue to operate and function, thus avoiding the chaos of multiple proceedings.”
FDIC Announces Agreement with Canadian Counterpart on Cross-Border Bank Resolution
On June 12, the FDIC announced the signing of a memorandum of understanding (MOU) with the Canada Deposit Insurance Corporation to formalize existing efforts between the two regulators to cooperate on effective resolution planning in the event of the failure of large, complex financial institutions that maintain operations in both countries. The MOU provides a framework for the parties to consult and share resources and information when addressing a bank resolution, and contemplates future coordination on related policy issues.
FDIC Approves Final Rule Related to Resolution of Nonbanks
On June 4, during a board meeting, the FDIC approved a final rule to establish criteria for determining if a nonbank is predominantly engaged in “activities that are financial in nature or incidental thereto” and, as such, can be subject to the Orderly Liquidation Authority granted to the FDIC under Dodd-Frank Act Title II. Under the rule, a company is predominantly engaged in financial activities if at least 85 percent of a company’s revenues are derived from financial activities under either of two revenue tests (i.e., the two-year test or the facts and circumstances analysis). The rule adopts for Title II the same definitions of activities that are financial in nature that the Federal Reserve Board adopted for purposes of Title I, except that the FDIC’s rule also includes finder activities that the Federal Reserve Board determined in its rulemaking are incidental to financial activities. The rule will take effect 30 days after its publication in the Federal Register.
Banking Regulators Issue Additional Resolution Plan Guidance
On April 15, the Federal Reserve Board and the FDIC issued additional guidance for the first group of institutions required to submit resolution plans pursuant to the Dodd-Frank Act. That group includes 11 institutions that submitted initial resolution plans last year. Based on their review of those initial plans, the regulators offer additional instruction as to what information should be included in the 2013 submissions, including more detailed information about certain potential obstacles to resolvability under the Bankruptcy Code. Given the additional request, the regulators also extended the due date for the plans from July 1, 2013 to October 1, 2013.
FDIC Reveals Banks' Living Wills
On July 3, the Federal Deposit Insurance Corporation (FDIC) posted the public sections of the initial resolution plans submitted by sixteen large bank holding companies. The resolution plans were required by the Dodd-Frank Act. The documents are meant to act as living wills that spell out how the banks could wind themselves down in the event of their failure. Generally, the public portions of these plans contain an outline of the banks organization, assets and capital ratios, and describe in high-level detail the mechanisms that each would employ to wind up its operations in the event of failure. The plans are subject to revisions following review by the FDIC and the Federal Reserve.
European Bank Resolution Proposal Released
On June 6, the European Commission released a proposal to establish common rules for EU member country banking regulators to follow when faced with failing banks. The rules are meant to provide a more standard regulatory structure and approach to help reduce the impact of bank failures, improve market stability, and limit taxpayer risk. To achieve these goals, the Commissions proposal would allow banks that do not pose a systemic risk to fail. Further, the proposal would shift the burden of restructuring costs for a systemically important troubled bank to its shareholders, creditors, and any employees responsible for mismanagement. Public authorities would be given new powers to (i) intervene earlier, (ii) establish in advance bank resolution plans, (iii) assume control of a failing bank if early intervention fails, and (iv) better coordinate cross-border issues raised by a failing bank. Banks, for their part, would be required to put in to place recovery plans and take certain actions if capital reserves fall below a set level, among other things. The proposals must first be considered and approved by the European Parliament and Council, and would take effect in 2018.