The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requires certain financial firms to periodically submit a resolution plan to the Board of Governors of the Federal Reserve System (the “Fed”) and the Board of Directors of the Federal Deposit Insurance Corporation (the “FDIC,” and together with the Fed, the “Agencies”). Each plan, known colloquially as a Living Will, must describe the firm’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company. These plans provide a blueprint for regulators and bankers for how to unwind these significant institutions with minimal impact to the taxpayer.

Section 165(d) of Dodd-Frank and the Rule promulgated by the Agencies thereunder provide the criteria for which firms must submit a plan to the Agencies. Eventually, all banking organizations with total consolidated assets of $50B or more and nonbank financial companies designated by the Financial Stability Oversight Council (the “FSOC”) must file annually according to a staggered schedule set by the Agencies. The amount and type of information submitted depends on the size of the firm (i.e., smaller firms will generally have smaller and less comprehensive plans). The first-wave filers, or those with $250B or more in nonbank assets, were required to submit their initial plans by July 1, 2012.1 The second-wave filers, or those with between $100B- $250B in nonbank assets, submitted their first plans by July 1, 2013.2 Both groups must submit an updated plan by July 1 annually. The third-wave filers, or those with between $50B-$100B in nonbank assets, filed their initial plans on December 31, 2013, and must file annually by December 31.3 FSOC also designated AIG and GE Capital to submit a plan, which they did on July 1, 2014.

The Agencies must review each plan and determine if the plan is not credible or would not facilitate an orderly resolution. The Agencies have the power to impose: (a) more stringent capital, leverage or liquidity requirements; (b) growth, activities, or operations restrictions; or (c) after 2 years and in conjunction with FSOC, divestiture requirements on firms who submit failing plans.

In August 2014, the Agencies provided mostly negative feedback on the first-wave filers’ 2013 plans (the 11 banks’ second submission). Common criticisms included (i) unrealistic or inadequately supported assumptions about behavior of customers, counterparties, investors, financial market utilities, and regulators, and (ii) the failure to make or identify the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution. The Agencies urged certain banks to establish a less complex legal entity structure; to develop a holding company structure; to amend financial contracts to provide for a stay of certain early termination rights; to ensure continuity of shared services; and to demonstrate operational capabilities for resolution preparedness.

A few days after the Agencies announced the inadequacy of the first-wave filers’ 2013 plans, they also gave feedback on the third-wave filers’ initial submissions. The Agencies provided a tailored resolution plan template for third-wave filers to use in 2015 that focuses on nonbanking operations of the firm and interconnections/interdependencies between nonbanking and banking operations.

Each of these firms now has experience developing this colossal document with critical implications. Moreover, these firms must incorporate all subsequent regulatory guidance from the Agencies into their respective plans. For example, the Fed’s Enhanced Prudential Standards (EPS) under Dodd-Frank, announced in 2012, now applies to foreign-banking organizations (FBOs).4 EPS require substantial organizational shifts including enhanced stress-testing (CCAR), more stringent liquidity and holding company capitalization requirements, and alterations in legal entity structures. U.S. banks already discuss these requirements in their respective plans; FBOs must discuss these changes and adhere to the timeline(s) outlined by the Fed beginning in their 2015 submissions. The Agencies have potent punishment power for inadequate plans, so firms have essentially created a year-round process to ensure they do not submit a failing document.

 

 

1 The first-wave filers are: Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp., and UBS.

2 The second-wave filers are: Wells Fargo, BNP Paribas, HSBC, and RBS.

3 The third-wave filers include approximately 115 firms, the large majority of which are foreign financial firms doing business in the United States.

4 The Board’s Final Rule for foreign banking organizations was issued in February of 2014 as “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations“.

 

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