165(d) Resolution Planning Guidance for Large Regionals and Certain Foreign Banks

A few things to look out for in next week's Fed/FDIC proposal

Aug 26, 2023

After the 2008 financial crisis international and U.S. banking regulators took several steps to improve the resolvability of large financial firms. One new feature of the post-crisis regulatory regime in many jurisdictions was a requirement that large financial institutions file resolution plans. The U.S. requirement to prepare and submit these plans, called 165(d) plans after the section of the Dodd-Frank Act that requires them, was implemented through rules jointly adopted by the Federal Reserve Board and FDIC.

According to a notice filed by the FDIC, next Tuesday in addition to proposing a long-term debt requirement for firms with $100 billion or more in total assets not currently subject to such a requirement, the FDIC, presumably joined by the Federal Reserve Board, will publish proposed 165(d) resolution planning guidance for “Triennial Full Filers.” This post provides context and highlights a few things to watch.

Application of the Proposed Guidance

As part of their regulatory tailoring efforts following the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act, the Federal Reserve Board and FDIC in 2019 revised the 165(d) rule.

Under the revised rule, the eight U.S. GSIBs are required to file resolution plans every two years, alternating between full and targeted plans. Other large firms subject to the 165(d) rule are required to file resolution plans every three years, again alternating between full and targeted plans. The agencies call firms described in the previous sentence “Triennial Full Filers” to differentiate them from foreign banks with comparatively limited operations in the United States which are nonetheless subject to the 165(d) rule and required to file plans every three years. These firms file “reduced” plans and are referred to as Triennial Reduced Filers.

For U.S. firms, the 165(d) rule currently applies to Category I, Category II and Category III bank holding companies. The U.S. GSIBs (i.e., Category I firms) are already subject to resolution planning guidance, as are certain specified foreign banking organizations. For U.S. purposes,1 that leaves the following firms as Triennial Full Filers:

Northern Trust - the only U.S. firm currently designated as a Category II banking organization under the Board’s tailoring rules; and
U.S. Bancorp, Truist, PNC, Capital One - currently all Category III banking organizations.

Category IV U.S. bank holding companies - i.e., firms with total assets below $250 billion and not otherwise falling into a different Category - are not currently required to file resolution plans. The Biden Administration has called for this requirement to be reimposed.

No savings and loan holding company, regardless of Category under the tailoring framework, is currently subject to the 165(d) rule.2

Abridged History of 165(d) Resolution Planning Guidance

Early U.S. GSIB Resolution Planning Guidance

The first resolution plans required under the 165(d) rule were filed by 11 firms in 2012.3 After reviewing these initial plan submissions, the Board and FDIC determined that “additional instructions” would be helpful, and so released more detailed guidance for these domestic and foreign first-wave filers.

After that the agencies continued to identify areas for improvement in large firm resolution plans. For example, the agencies in 2014 noted shortcomings in the plans filed by first-wave filers in 2013 that would need to be addressed in the firms’ next (2015) submissions. A few years later, upon review of those 2015 submissions by U.S. firms, the agencies in April 2016 announced that they had identified shortcomings or deficiencies in many of the plans. This meant that several U.S. GSIBs had to revise and resubmit their plans.

To further assist firms in “developing their preferred resolution strategies,” the Board and FDIC in April 2016 released new guidance for the U.S. GSIBs for purposes of their 2017 resolution plan submissions.

This guidance identified certain resolution planning “capabilities or optionality [that] should be developed.” Among other things, the agencies stated that a firm should have “an appropriate model and process for estimating liquidity at or readily available to material entities and a methodology for estimating the liquidity needed to successfully execute the resolution strategy.” To this end, the agencies set out a supervisory expectation that firms have appropriate resolution liquidity adequacy and positioning (RLAP) and resolution liquidity execution need (RLEN). As described by the agencies:

With respect to RLAP, the firm should be able to measure the stand-alone liquidity position of each material entity (including material entities that are non-U.S. branches) — i.e., the high-quality liquid assets (HQLA) at the material entity less net outflows to third parties and affiliates — and ensure that liquidity is readily available to meet any deficits. The RLAP model should cover a period of at least 30 days and reflect the idiosyncratic liquidity profile and risk of the firm. […]
The firm should have a methodology for estimating the liquidity needed after the parent's bankruptcy filing to stabilize the surviving material entities and to allow those entities to operate post-filing. The RLEN estimate should be incorporated into the firm's governance framework to ensure that the firm files for bankruptcy in a timely way, i.e., prior to the firm's HQLA falling below the RLEN estimate. […]

The guidance also sets out similar expectations with respect to capital adequacy and positioning (RCAP) and capital execution need (RCEN).

Early Foreign Banking Organization Resolution Planning Guidance

Similar to what they did with the guidance for U.S. GSIBs, the agencies later released guidance applicable to the 2018 filings of four foreign banks with significant operations in the United States — Barclays, Credit Suisse, Deutsche Bank and UBS. The FBO guidance was broadly similar to the guidance for U.S. GSIBs released in 2016, including through its inclusion of RCAP, RCEN, RLAP and RLEN expectations.

Later Guidance Developed Through Notice and Comment

None of the guidance documents discussed above were issued for comment before being finalized. This was controversial in some quarters, particularly where these requirements materially changed the expectations for resolution plans or, in some cases, imposed de facto new regulatory requirements. Trade associations contend, for example, that for many banking organizations it is RLAP and RLEN requirements (and not, for example, the LCR or NSFR) that are the source of their binding liquidity constraint.4

U.S. GSIB Resolution Planning Guidance

In 2018, the Board and FDIC changed course, releasing for the first time in June 2018 proposed guidance for the eight U.S. GSIBs that was subject to notice and comment. This guidance was finalized in December 2018 and compared to previous guidance was principally updated in relation to payment, clearing and settlement activities and derivatives and trading activities. In contrast, the guidance on capital and liquidity was materially unchanged, although the agencies did say they intended to issue, at an unspecified time in the future, “information addressing issues relating to intra-group liquidity and internal loss absorbing capacity in resolution.”

Resolution Planning Guidance for Specified FBOs

As they did with domestic firms in 2018, the agencies also moved to seek comment on resolution planning guidance for certain foreign banking organizations, proposing guidance in March 2020 and finalizing it in December 2020.

In a key change from the guidance previously applicable to FBOs subject to the new guidance, and unlike the current guidance applicable to U.S. GSIBs, the current FBO resolution planning guidance does not include expectations relating to positioning of capital (RCAP) or liquidity (RLAP). The agencies explained:

The final guidance does not include RCAP expectations concerning the appropriate positioning of capital and other loss-absorbing instruments among the U.S. IHC and its subsidiaries because existing TLAC requirements applicable to the U.S. IHC provide a backstop of resources that is appropriate to the size and complexity of the Specified FBOs.

Like the rationale for eliminating RCAP from the final guidance, because of the Specified FBOs' relatively simple U.S. legal entity structures and reduced risk profiles, the final guidance does not include RLAP expectations concerning the appropriate positioning of liquidity among the U.S. IHC and its subsidiaries.

RCEN and RLEN expectations were retained.

Commitment to Notice and Comment for Future Changes

The agencies have now committed to making any future changes to generally applicable resolution planning guidance (as opposed to firm-specific feedback) only through notice and comment.5

[T]he agencies intend to make any future general guidance concerning resolution planning available for public comment, and will endeavor to finalize any such general guidance at least one year prior to the submission date for the first resolution plan submission to which it would apply. The agencies will continue to provide firm-specific feedback on resolution plan submissions without first making that firm-specific feedback available for notice and comment.

The Forthcoming Guidance

U.S. regional bank holding companies have not to this point been provided with detailed, generally-applicable resolution planning guidance equivalent to that provided to the U.S. GSIBs and certain FBOs. Instead, guidance has been provided in the form of feedback letters and other interactions with the Federal Reserve Board and FDIC.

In September 2022, the agencies announced that they planned to change this.

The Federal Deposit Insurance Corporation and the Federal Reserve Board on Friday jointly announced they anticipate issuing guidance to help certain large banks further develop their resolution plans. […]
The guidance from the agencies would apply to Category II and Category III banking organizations—generally those with more than $250 billion in total assets but that are not global systemically important banks—and which have not already received guidance. Larger and more complex banks are already subject to guidance from the agencies. The agencies will seek and consider public comment on the guidance before it is finalized.

In form letters sent to Triennial Full Filers last year, the agencies stated that they expected this guidance to be issued “in advance of the 2024 Full Plan submission deadline” and for it to be used by firms to “assist in the development of their 2024 Full Plan Submissions.”

Set out below are four things I am curious to see addressed (or not addressed) by the proposed guidance.

Tailoring and Recognition of Differing Resolution Strategies

As with most of the regulatory changes that have been or will be proposed by the agencies following the failure of SVB, an overarching question is the extent to which the agencies continue to believe that regulatory requirements for firms with more than $100 billion in total assets should be differentiated within that group. That is, should all firms of this asset size and above generally be subject to the same requirements, or should requirements vary within this subgroup based on relative size and risk profile?

In the context of last month’s capital rules proposal, the agencies expressed a clear preference for the former approach, proposing to apply most of the revised rules across the board to all >$100 billion asset firms, regardless of whether the firm is in Category II, III or IV, with certain additional requirements for U.S. GSIBs.

In contrast, the current 165(d) resolution plan rule reflects a significant degree of tailoring:

U.S. GSIBs are subject to more frequent filing requirements and their plans are subject to more exacting review than those plans filed by comparatively smaller U.S. firms.
The guidance for the specified FBOs adopted in 2020 included several changes to the guidance previously applicable to such firms. These changes generally eased expectations and were predicated in part on the agencies’ views of the “current business and risk profiles of the Specified FBOs’ U.S. operations.”
U.S. firms with below $250 billion in total assets generally do not have to file 165(d) resolution plans at all, unless other risk-based indicators mean they are in Category II or Category III.

Undoing some of this tailoring may be the goal of a future rulemaking, but based on the FDIC’s meeting notice none of this looks to be on the agenda for action next week.

That still leaves the question, though, of the extent to which the proposed guidance for Triennial Full Filers will resemble the current guidance for U.S. GSIBs, and how much recognition there will be of regional bank business models and organizational structures which look different than those of the U.S. GSIBs.

The most fundamental place this will come up is in the context of overall resolution strategy. The agencies insist that they “do not prescribe specific resolution strategies for any firm, nor do the Agencies identify a preferred strategy,” but all U.S. GSIBs (eventually6) adopted single point of entry resolution strategies in which only the top-tier parent company would enter bankruptcy proceedings.

Currently, each firm's resolution strategy is designed to have the parent company recapitalize and provide liquidity resources to its material entity subsidiaries prior to entering bankruptcy proceedings. This single point of entry (“SPOE”) strategy calls for material entities to be provided with sufficient capital and liquidity resources to allow them to avoid multiple competing insolvencies and maintain continuity of operations throughout resolution.

U.S. regional bank holding companies currently have adopted a different strategy:

As described in the public sections of the resolution plans filed by Category II and III large banking organizations, a multiple-point-of-entry (MPOE) resolution strategy is generally contemplated by these firms, in which the parent holding company would enter bankruptcy and the insured depository institution subsidiary would undergo FDIC-led resolution under the Federal Deposit Insurance Act (FDI Act). In conducting the insured depository institution-level resolution, the FDIC can, among other things, provide liquidity when necessary and take advantage of the statutory stays on derivatives and other qualified financial contracts, as well as its own historical experience in administering insured depository institution-level resolutions.

In light of this difference in strategies, the agencies in form letters last year previewed a few potential areas of focus for the forthcoming guidance.

Aspects of this guidance may include: demonstrating that a resolution strategy which utilizes a bridge depository institution is the least costly to the Deposit Insurance Fund; providing one or more options for exit from a bridge depository institution, applying certain criteria; and calculating liquidity needs in resolution and analyzing how those needs would be met.

Recall also the agencies commentary in last year’s ANPR on an LTD requirement for large regional banks, which said that even though an MPOE resolution strategy “may be appropriate” for such firms, the agencies believe additional optionality would be valuable.

While an MPOE resolution strategy may be appropriate for a large banking organization, without sufficient loss absorbing resources at the insured depository institution, the options available to the FDIC for resolving the subsidiary insured depository institution under the FDI Act may be limited. The size and funding profile of large banking organizations merits consideration of whether a larger set of options, supported by additional resources at the insured depository institution is needed to contain the impact of their failure on the larger financial system immediately and over time, and the potential costs of such an approach. Particularly for the largest and most complex large banking organizations, the availability of ex ante loss-absorbing capacity could be helpful in a range of resolution scenarios, including a bail-in recapitalization or a bridge bank, that would afford the FDIC the ability to stabilize operations, preserve franchise value, and provide more time to consider the impact on future financial stability of marketing a failed institution in whole or in parts.

Presumably then the 165(d) guidance may seek to describe the capabilities the agencies believe that a Triennial Full Filer would need to have to ensure that an LTD requirement, when finalized, would in fact enhance optionality.

Interaction with FDIC IDI Plan Rule

In addition to this jointly proposed 165(d) resolution plan guidance, the FDIC next week also intends to propose changes to its rule requiring standalone resolution plan filings from all insured depository institutions with $100 billion or more in total assets (IDI plan rule).

The IDI plan rule was proposed by the FDIC prior to the enactment of the Dodd-Frank Act and is not a statutory requirement. As a result, the FDIC has more flexibility in determining to which firms it applies, and on what frequencies plans should be submitted.

The IDI plan rule when first adopted applied to all IDIs with $50 billion or more in total assets. ($50 billion in total assets was also the initial threshold for the 165(d) rule.) As a result, many firms were required to (1) file 165(d) plans for their holding company (including a strategy for how any IDI subsidiaries would be addressed in a resolution) and (2) file separate IDI resolution plans focusing only on how the IDI could be resolved under the Federal Deposit Insurance Act.

This led to industry concerns about duplicative or unnecessary requirements, particularly from firms that adopted SPOE strategies - i.e., strategies in which their IDI subsidiary continues to operate without entering into resolution proceedings - which, the firms contended, made a standalone IDI plan unnecessary.

In November 2018, the FDIC’s then-Chairman Jelena McWilliams announced that the FDIC intended to make revisions to the IDI plan rule to, among other things, address the “costs and burdens involved in developing these plans” and to make sure that applicable requirements were “appropriately tailored to reflect differences in size, complexity, risk, and other relevant factors.”

While recognizing this need for tailoring, Chairman McWilliams also signaled, however, that the FDIC continued to believe there was value in some sort of standalone IDI plan requirement, even for firms that have adopted SPOE strategies:

I recognize that some have argued that an IDI plan is unnecessary for firms that have adopted an SPOE strategy, because there should not be a resolution of the IDI under such circumstances. Though I am sympathetic to the argument, as I mentioned earlier, SPOE is untested, and the challenges to successful execution of an SPOE strategy are notable.

In light of the FDIC’s plans to revise the rule, the agency determined that until those revisions were completed no IDI plan submissions would be required from any firm. The FDIC issued an ANPR on potential changes to the IDI plan rule in April 2019, but the agency’s ability to move forward with an NPR and, ultimately, a final rule was undermined by the COVID-19 pandemic and other factors. In January 2021, with no revised rule immediately on the horizon, the FDIC announced that it was un-pausing the IDI plan requirement for banks with $100 billion or more in total assets.

This all means that under current requirements the resolution planning landscape for U.S. firms looks like this:

U.S. GSIBs are required to file 165(d) resolution plans and their IDI subsidiaries must file IDI plans.
U.S. Category II and Category III bank holding companies are required to file 165(d) resolution plans and their IDI subsidiaries must file IDI plans.
Category IV bank holding companies are not required to file 165(d) resolution plans, but their IDI subsidiaries must file IDI plans.7
Other IDIs with $100 billion or more in total assets must also file IDI plans, even if they are subsidiaries of a firm not subject to 165(d) resolution plan requirements (or not a subsidiary of any holding company at all).

The way the agencies got here was a little bumpy, and you can argue that other approaches make equal or greater sense, but at bottom the situation described in points 1, 3 and 4 above is fairly straightforward to defend. On point 1, as Chairman McWilliams said, even if a U.S. GSIB has adopted an SPOE strategy it is reasonable to conclude there is still some value in considering under the IDI plan rule how a resolution of a giant IDI would go, even if the firm’s ideal plan is for the IDI to stay out of resolution proceedings. And the 165(d) rule for U.S. GSIBs is also important on its own because it requires those firms to think about the continuation or resolution of their nonbank and international operations, many of which are significant. As for points 3 and 4, if it is going to continue to be the case that smaller regional bank holding companies (or SLHCs) are not currently subject to a 165(d) plan requirement, the IDI plan rule appropriately requires those firms, many of which operate almost entirely through their bank anyways, to think about resolution under the FDI Act.

The more difficult question relates to point 2. U.S. firms in Category II and Category III that are currently subject to 165(d) plan requirements, although larger than their smaller peers, look more like those firms in terms of business model and organizational structure than they do to the U.S. GSIBs. This could mean that the key portions of a 165(d) plan, which presumably focus on how to resolve the IDI subsidiary under the FDI Act, would wind up addressing, and overlapping with, a question that is also at the core of the IDI plan rule.

To be fair, the overlap would not necessarily be total, and as Chairman McWilliams explained in 2018 the 165(d) rule and the IDI plan rule arguably have different priorities, such that having both rules could make sense, even if the underlying resolution strategy reflected in plans submitted under both rules is the same:

[T]he Dodd-Frank requirement is focused on financial stability and mitigating systemic risk. The IDI plan, by contrast, is focused on the FDIC's ability to resolve a particular firm. This focus includes two critical priorities – first, that we must protect taxpayers and minimize potential losses to the Deposit Insurance Fund, which taxpayers stand behind, and second, that insured depositors have access to their cash in an orderly fashion and as quickly as possible.

In any case, the point of all this is just to say that it seems likely that both the Board/FDIC proposed Triennial Full Filer 165(d) guidance and the FDIC’s proposed updates to the IDI rule will include expectations related to execution of a bridge bank strategy, and regional banks will be on the lookout for any areas of inconsistency or other potential tension between the two proposals.8

Specified FBOs

As noted above, certain foreign banking organizations have already been given detailed, generally-applicable guidance on their 165(d) plans. This guidance, finalized in 2020, applies to “Specified FBOs.” For purposes of the guidance, a Specified FBO is defined as a foreign banking organization that is in Category II under the regulatory tailoring framework. At the time the guidance was finalized, this group was going to include Barclays, Credit Suisse, Deutsche Bank, and, after a transition period, MUFG.

Since then the picture for foreign banks operating in the United States has changed significantly. Credit Suisse was sold to UBS and MUFG has divested its regional banking franchise, while other foreign banks have made or have sought to make acquisitions that would grow their U.S. operations significantly. Moreover, the Federal Reserve Board has proposed changes to the calculation of cross-jurisdictional activity that, if adopted as proposed, are expected to result in a number of foreign banking organizations currently in Category III or Category IV becoming subject to Category II standards.

Last year, the Board and FDIC described next week’s forthcoming guidance as applying to “triennial full filers that are not already subject to resolution planning guidance.”

If that remains the approach, this would mean that Barclays and Deutsche Bank (and UBS after completing any required transition period) would be subject to the FBO guidance finalized in 2020, while certain other FBOs would, at least for now, be subject to the forthcoming guidance.

There is no reason in theory this could not work, but it could be a little messy in practice. For one thing, it would effectively mean that the agencies in August 2023 will need to have the same view of the difficulty in resolving the U.S. operations of FBOs as they did in 2020 - otherwise, FBOs subject to this new guidance could be subject to different and more stringent requirements than the Specified FBOs, which seems backwards.

More fundamentally, having one version of guidance for Category II FBOs and a different version of guidance for other FBOs that are also Triennial Full Filers would imply that there is a difference in riskiness for Category II FBOs as compared to other Triennial Full Filer FBOs. It is not impossible to make that case, but do the agencies still believe that? Recent commentary regarding tailoring suggests otherwise.

Timing for Next 165(d) Plans

The Board and FDIC have committed to notice and comment for resolution planning guidance. In connection with that commitment, the agencies have said that they “will endeavor to finalize any such general guidance at least one year prior to the submission date for the first resolution plan submission to which it would apply.”

As things currently stand, the next resolution plan for Triennial Full Filers is due on or before July 1, 2024. That is already inside the one-year window. The agencies thus have a choice to make, and I am not sure there is a perfect solution.

Delaying the Filing Deadline

One approach would be to delay the filing deadline for the next 165(d) plan submissions for Triennial Full Filers until a year after the guidance is finalized. On its face this looks like a fairly straightforward option, but the long-term debt proposal also due to be released next week may complicate this. It may not make sense to finalize resolution planning guidance until the agencies know what a final LTD rule is going to say, and this may not be known until the middle of next year or later. If the resolution plan guidance is also delayed until then, this would mean that resolution plans would probably not be due from Triennial Full Filers until sometime in 2025. I am not sure this would be the worst thing in the world, but it could be tough to justify for agency principals who have criticized the post-EGRRCPA infrequency of resolution plan filings.

A middle ground approach could be to push back the 165(d) filing deadline until around September 2024 (so one year after the guidance is proposed, rather than one year after it is finalized). But that would require the guidance not changing very much between proposed and finalized versions, and if the agencies have already concluded the guidance is not going to change very much from the proposal, what does that suggest about the public comment process?

Keep the Filing Deadline

The agencies could instead of course keep the current filing deadline. The most aggressive way to do this would be to just say that despite their best endeavors they were not able to get the guidance out a year ahead of time but, nevertheless, firms will need to take the guidance when finalized into account in drafting their July 2024 resolution plans. This would probably result in something of a fire drill for firms and their advisors when the guidance is finalized, and I think it is therefore unlikely. It must be noted, though, that the agencies do have a recent track record of perhaps not taking entirely seriously the resolution planning commitments they made before 2021.9

In the alternative, if they want to keep the July 2024 deadline, the agencies could just direct the Triennial Full Filers to prepare their resolution plans in light of the existing feedback they have received, without needing to take into account anything in the proposed guidance. If the agencies are eager to have 165(d) plans in front of them for review as soon as possible then this is the most straightforward approach, but again it could be a little awkward. The forthcoming guidance, as described by the agencies, is based on a “number of aspects” they have identified where “further progress could improve preparations for a rapid and orderly resolution” of a firm in distress. If the agencies previously concluded that more detailed, generally-applicable guidance was necessary with respect to these areas of improvement, to what extent can Triennial Full Filers be expected to have improved their plans in the absence of that guidance?

This post went on for much longer than I originally planned and in hindsight I am not sure how well it functions as a preview. In any case, if you have made it this far thanks very much for reading. If you have thoughts on the forthcoming proposed guidance or other feedback you would like to share, you may email bankregblog@gmail.com

I am a little less certain about which foreign firms will be subject to this guidance, for the reasons discussed further below.

Section 165(d) of the Dodd-Frank Act refers only to bank holding companies and nonbank SIFIs. SLHCs therefore argue (self-interestedly, but I think correctly) that this means SLHCs cannot be subject to the 165(d) plan rule unless the SLHC is designated as a non-bank SIFI.

First, section 165 is clear by its terms that the agencies only have resolution-related authority over BHCs and nonbank SIFIs. Specifically, section 165(b )(1 )(A) requires the FRB to establish resolution planning requirements, and section 165(d)(l) defines the scope of the resolution planning requirements; both provisions only provide legal authority with respect to nonbank SIFIs and BHCs.
Nonbank SIFIs may clearly include SLHCs. […] Thus, Congress provided a clear mechanism to require resolution plans for SLHCs or impose other resolution-related requirements-the FSOC may designate them as nonbank SIFIs. Correspondingly, it is clear that, absent an FSOC designation, SLHCs are not within the scope of resolution planning or other resolution-related requirements.

The determination of who was required to go first was based on a nonbank assets threshold. Based on where the threshold was set, the first-wave of filers included all the U.S. GSIBs other than Wells Fargo, as well as four foreign banks (Barclays, Credit Suisse, Deutsche Bank, and UBS). Wells Fargo eventually became subject to a requirement to file on the same timeline as the other U.S. GSIBs.

From 2021:

The size of the liquidity requirements imposed by RLAP and RLEN are treated as confidential supervisory information; however, many large banks have reported that resolution liquidity requirements are the most binding constraint.

Also, from 2018:

Several large banks have stated that it is the living will guidance, and not the LCR or other liquidity requirements, that currently is the binding determinant of the amount of liquidity transformation they produce.

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