The Last Minute Fed/FDIC Resolution Plan Feedback Delay
Under their jointly adopted resolution planning rules, the Federal Reserve Board and FDIC are required to identify any deficiencies or shortcomings in a firm’s resolution plan “no later than 12 months after” the later of the date on which the plan was submitted or was required to be submitted.1 Because the 2021 resolution plans submitted by the eight U.S. global systemically important banking organizations were due by July 1, 2021, last Friday was the deadline for the agencies’ to deliver their verdict.
The agencies, however, announced on Friday afternoon that they would not meet this deadline, and that feedback on the plans would instead be delayed “to allow the agencies additional time to analyze them.” Although not stated in the announcement, the legal basis for this delay, presumably, is a provision of the resolution plan rules which permits the agencies to disregard the 12-month deadline if the agencies “determine in their discretion that extenuating circumstances exist that require delay.”2
If this is the case, though, it is tough to reconcile this use of the agencies’ authority with the statements the agencies previously made about the extremely limited circumstances in which they would seek to exercise it:3
The agencies recognize firms' strong interest in prompt firm-specific feedback from the agencies and in having sufficient time to respond thereto, and would expect to exercise their authority to provide such notice after the one-year period only when providing the notice within a year would be impractical due to circumstances outside the agencies' control.
The Friday announcement did not identify any extenuating circumstances at all, whether within the agencies’ control or otherwise.
Governors Bowman and Waller each dissented from Friday’s action, although neither of the (very short) dissents provided any more clarity on what is going on behind the scenes.4 I am not sure this post will offer much definitive clarity either, but there are a few pieces of potentially relevant context.
Targeted Plans
Under the current resolution plan rules, the U.S. G-SIBs alternate every two years between submissions of full plans and of “targeted” plans, which are abbreviated versions of full plans5 accompanied by information responsive to targeted information requests from the agencies about “resolution-related key areas of focus, questions, and issues.”6
2021 was the first targeted plan year under the new rules, and consistent with the rules the targeted information request from the agencies was issued in late June 2020. The key area of focus at that time naturally was the COVID-19 pandemic and actions taken by banking organizations in response to it. Accordingly, the agencies directed each firm to include in its 2021 targeted submission a discussion of the firm’s “response to the stress caused by the coronavirus,” which would be used to “inform [the agencies’] assessment of the [firm’s] resolution-related capabilities and infrastructure.”7
As a result, the forthcoming feedback on the 2021 resolution plans is not expected to necessarily be limited to feedback on the plans themselves (the broad strokes of which likely have not changed much at all since 2019) but will also provide the agencies an opportunity to identify any resolution planning deficiencies or shortcomings that may have been revealed by the COVID-19 pandemic. As with other supervisory work involving the U.S. G-SIBs, the agencies’ review of the resolution plans involves both a review of the firm’s individual plan, as well as a horizontal review by the agencies across plans.
All of this could explain why the agencies, not unreasonably, prefer to take a bit more time with the review. But if this is what is going on, what would have been the harm in just saying so?
Agency Divergence
Another, more speculative, possibility as to what is going on behind the scenes is a divergence between the Board and the FDIC. The resolution plan rules contemplate that the agencies will jointly identify deficiencies, but the agencies’ determinations have not always been uniform, with one agency sometimes finding a plan not credible while the other agency stops short of making that determination.8
The FDIC has been quickest to embrace the new era in bank regulation which some were hoping would be ushered in by change in presidential administrations, and I wonder whether the FDIC staff’s initial views on the submissions may have been less favorable than that of the Board staff. If so, perhaps the agencies decided to take more time to see if they could reach an agreement (and, in the case of the Board, to potentially allow the Vice Chair for Supervision to weigh in, once confirmed) before making a public announcement potentially revealing their divergence.9
Critical Operations Review
The resolution plan rule defines a critical operation as a firm’s operation the failure or discontinuance of which would pose a threat to the financial stability of the United States. Banking organizations are required to maintain their own process and methodology for identifying critical operations, and the agencies also independently conduct their own periodic review of firms’ operations to identify those operations that should be deemed critical.10
In July 2020 the agencies announced that they had “recently completed a review of critical operations” and that they also planned “to complete another such review by July 2022,” with this second review intended to “include a further, broader evaluation of the framework used to identify critical operations.”
Based on publicly available information, this review due by July 2022 has not yet been completed, although it is worth noting that because critical operation designations are confidential supervisory information public disclosures related to this review, if any, are likely to be short on firm-specific details.
Foreign Firms and Large U.S. Regionals
Even though it is premature at this point, it is tough to resist using Friday’s announcement as an occasion to speculate as to whether the announcement signals a more aggressive approach to resolution plan reviews than that adopted by the agencies in the latter part of the last decade. If so, while this could certainly matter to U.S. G-SIBs on the margins, the impact may be more acutely felt by foreign firms with significant U.S. operations and by U.S. super regionals, each of which - for understandable reasons - currently have comparatively less sophisticated U.S. resolution planning practices.11
For the super regionals in particular, if the FDIC really believes as it has hinted at recently that it would be appropriate for firms in this category to be subject to TLAC requirements, I wonder whether it might at least think about attempting to accomplish this through the resolution planning process, either in addition to or in the alternative to attempting to accomplish this through bank merger review process.12
Most large FBOs and large regionals submitted their most recent resolution plans in mid-December 2021,13 meaning that if the U.S. G-SIB feedback is unfavorable, it may be a nervous end to 2022 for such firms as they await their own feedback. Unless, of course, this deadline for feedback is also delayed by the agencies.
Again at section _.8(f).
This is from the 2019 Federal Register release in which the Board and FDIC adopted the current version of the resolution plan rule, with my emphasis added.
These are the first dissents from the right on a Board decision since then-Vice Chair for Supervision Quarles dissented in 2019 from the Board’s decision to develop the FedNow payments service, which itself was the first dissent from the right for quite a while. It bears watching whether this becomes a trend, especially once the Board’s rulemaking agenda picks up again after Michael Barr is officially confirmed as Vice Chair for Supervision.
The agencies explained in 2019 that they “proposed the targeted resolution plan to strike the appropriate balance between providing a means for the agencies to continue receiving updated information on structural or other changes that may impact a firm's resolution strategy while not requiring submission of information that remains largely unchanged since the previous submission.”
This is in section _.6(c) of the rule.
For example, one focus of resolution planning improvements has been the development of capital and liquidity forecasting capabilities, and related capabilities to accurately and timely capture capital and liquidity metrics. The targeted information request asked firms to explain the extent to which those forecasting capabilities were leveraged during the coronavirus event, and to discuss the extent to which the firm experienced any operational challenges in producing accurate and timely metrics.
Most notably, in April 2016 the agencies announced that they had “jointly identified weaknesses in the 2015 resolution plans of Goldman Sachs and Morgan Stanley that the firms must address, but did not make joint determinations regarding the plans and their deficiencies. The FDIC determined that the plan submitted by Goldman Sachs was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and identified deficiencies. The Federal Reserve Board identified a deficiency in Morgan Stanley's plan and found that the plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code.”
In other areas, cracks in the relationship between the agencies have already begun to show. For example, in late May Politico reported that the FDIC had chosen to pause work with the Board and OCC on several cryptocurrency-related matters.
See section _.3 of the rule.
For foreign banks, there is potentially a tension between their global resolution plans (i.e., the plan developed by the foreign bank (or its supervisors) for the entirety of the foreign bank’s operations, including those in the United States) and the U.S.-specific resolution plan required by the agencies’ resolution plan rule. In particular, the global resolution plans for many firms generally are designed to allow the U.S. operations to receive support from their foreign parent and therefore stay out of resolution proceedings, while the agencies’ U.S. specific resolution plan rule conservatively requires that the U.S. operations assume that their foreign parent cannot or simply will not provide support, and therefore the U.S. operations will need to be resolved. In partial recognition of this potential tension, U.S. resolution planning expectations for foreign banks have been tailored compared to those applicable to their U.S. G-SIB peers.
For large U.S. regional banks, their business models (and thus their resolution strategies) look much different to those of the U.S. G-SIBs.
I make no claims here as to the workability of this strategy, or for that matter its legality.
In its most recent supervision and regulation report from May 2022, the Board stated that “[c]urrently the agencies are reviewing plans submitted by the eight [U.S. G-SIBs] in July 2021, one new LFBO firm in September 2021, and 16 LFBO firms in December 2021.” A list of the firms that filed resolution plans in 2021 is available here.
Similar to the U.S. G-SIBs, the FBOs and large regionals were required to respond to a targeted information request addressing the actions they took in response to the coronavirus pandemic.