The FDIC Board is considering today a Final Rule to revise the resolution plan regulation for insured depository institutions (IDIs) under the Federal Deposit Insurance Act. 1 The FDIC published a notice of proposed rulemaking last September aimed at improving the effectiveness of resolution plans submitted under the current resolution plan rule, which has been in effect since 2012. 2
Today’s Final Rule would retain key provisions as proposed, which were designed to demonstrate how the covered IDI might be resolved in an orderly and efficient manner, and set clear expectations for their content. The FDIC received a number of thoughtful comments on the NPR. In response to commenters, the Final Rule includes targeted changes to the proposal. These changes primarily relate to the timing of submissions and the process of review and feedback to the covered IDIs to improve future submissions and enhance resolvability.
Each IDI has the best understanding of the value and operations of its franchise, and its development of a resolution strategy provides an essential input for the FDIC’s planning for a quick and effective response if the bank were to fail. Thus, the final rule retains the proposed approach for the development of a resolution strategy by the largest IDIs – those with at least $100 billion in total assets. The development of such a strategy, together with the supporting information and analysis, will materially improve the ability of the FDIC to prepare for and execute resolutions of the largest banks in a manner that preserves stability in the banking system and reduces costs to the Deposit Insurance Fund and other stakeholders. In light of the failure of three large regional banks last year, the case for strengthening resolution plan requirements is compelling.
While a rapid sale to a single acquirer may be an option at the time of failure, it may not always be possible or may require accepting significant costs to facilitate it. Therefore, the final rule retains the proposed requirement that the strategy developed in the resolution plans of the largest banks not be dependent on a sale executed over the weekend following the institution’s failure. It generally requires the bank to explain how it could be placed into a bridge depository institution, how operations could continue when separated from its parent and parent affiliates, and the actions that would be needed to stabilize a bridge depository institution.
Institutions with assets under $100 billion in total assets can also present resolution challenges. While the final rule does not require full resolution plans from covered IDIs with between $50 billion and $100 billion in total assets, it requires submission of information and analysis to inform the FDIC’s development of options to resolve such banks in a range of scenarios.
The requirements applicable to all IDIs covered by the rule include the demonstration of the capabilities necessary to support the marketing of the institution and its assets by the FDIC. This includes the capability to promptly establish a virtual due diligence data room and populate it with information necessary for interested parties to submit well-informed bids for all or parts of the institution. All covered IDIs are expected to engage with the FDIC to assess and test their resolution capabilities, including those that ensure the continuation of critical banking services and the potential marketing of the IDI’s franchise or its components.
In response to comments, the final rule provides for submissions every three years for most covered IDIs, together with interim supplements in the off-years that update the most timely information that would be critical if the institution were to fail. As compared to the proposed two-year submission cycle, a triennial cycle supports the priority to provide each covered IDI timely and fulsome feedback, and to ensure sufficient time between full resolution submissions for engagement and capabilities testing. Covered IDIs that are affiliated with U.S. GSIBs will be on a two-year cycle, as they are part of the largest and most systemic and interconnected U.S. banking organizations. This two-year cycle mirrors the biennial cycle of these banking organizations’ living wills submitted pursuant to Title I of the Dodd-Frank Act. 3
Like the proposal, the final rule provides a clear credibility standard for the FDIC’s review of full resolution submissions. We expect this clarity will help the banks understand the FDIC’s expectations and facilitate an effective review process. As set forth in the final rule, findings of one or more material weaknesses would support a determination of non-credibility. After considering both the comments on the proposal and the approach taken in reviews and feedback for the Title I living wills, the final rule introduces an intermediate level of feedback that requires correction with an appropriate level of urgency, i.e., significant findings. Unlike material weaknesses, the intermediate level feedback would not trigger the immediate corrective action requirement; however, a significant finding, if not remediated, could become a material weakness.
Other refinements from the proposal include changes to improve and clarify expectations for certain content requirements and a further narrowing of the requirements for submissions by banks with total assets between $50 billion and $100 billion.
I support the final rule, recognizing that a clear, consistent, and robust resolution planning requirement for large IDIs provides a much stronger foundation for their orderly resolution. I would also like to take this opportunity to mention two other actions that the FDIC Board took at the same time this NPR was adopted last year. The FDIC, acting in conjunction with the Federal Reserve and Comptroller of the Currency, also adopted a notice of proposed rulemaking to establish a requirement for eligible long term debt to be held by large IDIs to support optionality in resolution. In addition, the FDIC approved proposed revised guidance for Dodd-Frank Act resolution plans submitted by certain large banks, acting in coordination with the Federal Reserve. Work continues on both of these important initiatives.
Finally, I would like to thank the FDIC staff for their thoughtful and dedicated work on this important rulemaking to improve resolution planning by insured depository institutions under the FDI Act.
- 1
12 CFR 360.10.
- 2
FDIC Final Rule: Resolution Plans Required for Insured Depository Institutions with $50 Billion or More in Total Assets, 77 FR 3075 (Jan. 23, 2012); see also Interim Final Rule: Resolution Plans Required for Insured Depository Institutions with $50 Billion or More in Total Assets, 76 FR 58379 (Sept. 21, 2011).
- 3
12 U.S.C. 5365(d).