The New Fed/FDIC Resolution Planning Guidance
Learning from the past, without necessarily explaining what was learned
Today the FDIC and Federal Reserve Board issued proposed resolution planning guidance for certain large U.S. and foreign banks which file U.S. resolution plans every three years.
Rather than going with the uncreative but tried-and-tested “X Things We Learned” or “X Observations” tropes that this blog frequently falls back on, this post goes with a slightly different format, highlighting four things from the proposal that I found puzzling.
First, though, the background and a brief discussion of a few things the reasoning for which I found easier to follow.
Background
As explored at greater length a few days ago, there is currently 165(d) resolution planning guidance applicable to the U.S. GSIBs and to certain specified foreign banking organizations.
The point of today’s release was (in part) to issue proposed guidance applicable to other large firms, both domestic and foreign, that have not received generally applicable guidance for their 165(d) resolution plans. The agencies chose to release the proposed guidance in two separate documents, one for domestic firms and one for foreign banking organizations.
I am sure banks will find things to raise fair questions about after diving into the details,1 but much of the guidance is in line with what had previously been foreshadowed by the agencies, or otherwise reaches conclusions based on reasoning that is fairly easy to follow (even if not always explicitly stated). For example:
Increased Focus on IDI Resolution
As the agencies signaled in their feedback letters last year, the proposed guidance includes more detailed expectations with respect to insured depository institution resolution for firms that have adopted resolution strategies in which the firm’s material entity U.S. IDI subsidiary would be resolved separately. (That is, a strategy different from an SPOE strategy in which only the parent firm fails and thus the U.S. IDI never enters resolution proceedings.)
For example:
If the firm has a strategy other than payout liquidation through a bridge depository institution, its 165(d) resolution plan must demonstrate the feasibility of such strategy. The proposal sets out guidance for how a banking organization could do so in lieu of performing a complete least-cost analysis.
If the firm has a strategy envisioning a payout liquidation through the IDI, the plan must “demonstrate how the deposit payout and asset liquidation process would be executed in a manner that substantially mitigates the risk of serious adverse effects on U.S. financial stability.”
Regardless of strategy chosen, a firm must assume severely adverse conditions and, in light of those conditions, “explain the process for determining asset or business franchise values, including providing detailed supporting descriptions such as references to historical pricing, benchmarks, or recognized models; evidence supporting client attrition rates; and other relevant information.”
With respect to exit from resolution proceedings, a firm seeking to support the feasibility of an asset liquidation or bridge depository institution exit strategy could, for example, “describ[e] an actionable process, based on historical precedent or otherwise supportable projections, that winds down certain businesses, includes the sale of assets and deposits to multiple acquirers, or culminates in a capital markets transaction, such as an initial public offering or a private placement of securities.”
Specified FBOs
The proposed guidance for foreign banking organizations that are Triennial Full Filers would apply to all foreign banking organizations in that group, both those previously subject to resolution planning guidance (most recently updated in 2020) and those who are not. This was the most straightforward approach to having two different sets of guidance applicable to two different groups of FBOs, the distinctions between which are no longer particularly clear.
Discount Window
The proposed guidance for both domestic firms and FBOs includes a new explicit directive about assumptions that a plan is permitted to make regarding the discount window. This is consistent with other statements the banking regulators have made recently about the discount window and making sure that banks are ready to use it.2
The text below in italics is new; the text in plain text was also in the 2019 U.S. GSIB guidance and the 2020 FBO guidance, as applicable.
The Plan should support any assumptions that the firm will have access to the Discount Window and/or other borrowings during the period immediately prior to entering bankruptcy. To the extent the firm assumes use of the Discount Window and/or other borrowings, the Plan should support that assumption with a discussion of the operational testing conducted to facilitate access in a stress environment, placement of collateral and the amount of funding accessible to the firm. The firm may assume that its depository institutions will have access to the Discount Window only for a few days after the point of failure to facilitate orderly resolution. However, the firm should not assume its subsidiary depository institutions will have access to the Discount Window while critically undercapitalized, in FDIC receivership, or operating as a bridge bank, nor should it assume any lending from a Federal Reserve credit facility to a non-bank affiliate.
Timing for Next Plan Submission
The Board and FDIC have previously said that they “will endeavor” to give firms at least one year after receiving general 165(d) planning guidance before they have to submit updated plans. In the post over the weekend I mentioned that the upcoming July 1, 2024 deadline for the next resolution plan submissions by firms that would be subject to this guidance could complicate this endeavor, and speculated as to what the agencies might do.
In today’s proposals the agencies do not stake out a firm position, but say that they “would like” firms subject to this guidance to submit 165(d) plans based on the final version of the proposed guidance “as soon as practicable.” They therefore say that there are considering a short extension of the July 1, 2024 deadline, but that even if that extension is provided the plans will still be due “sooner than one year” after the date of the final guidance.
Note that the comment deadline for the proposed guidance is November 30, same as the comment deadline for the LTD proposal released today, the IDI plan rule proposal released today, and the capital rules proposal released last month.
Four Puzzling Choices
Even if the above all makes sense, there are other statements or choices made by the agencies I am less sure about. Not because they are wrong necessarily, but because they are, at the least, underexplained.
As I’ve written before, and as is surely true here, 99.9% of the time when I do not understand something the issue is with me, and not with the person or group whose work I am struggling to wrap my mind around. Even so, I think for at least a few of these I will not be alone in being puzzled.
What Standard Do the Agencies Apply When They Review Plans?
U.S. domestic firms that would be subject to guidance proposed today last filed resolution plans in September or December of 2021. The group of domestic firms filing plans included Truist, Capital One, Northern Trust, PNC, and U.S. Bancorp.
The plans filed by each one of these firms apparently passed muster with the agencies, without the finding of any deficiencies or shortcomings. Feedback letters sent to the firms3 stated simply that the agencies had identified “areas where further progress will help improve the preparation” of the firm for a rapid and orderly resolution.
In the preamble to today’s proposed guidance, the agencies embraced a more negative view of the 2021 submissions. These submissions, according to the agencies, “revealed significant inconsistencies in the amount and nature of information they provided on critical informational elements required by the Rule.”
Furthermore, the agencies stated today that some of the plans submitted in 2021 “included optimistic assumptions regarding the availability of financial resources at the firm at the time of a bankruptcy filing as well as the ability of a firm to access financial assistance prior to and during resolution.”
The first point to make here is that although I am sure the agencies are acting good in faith, we have no way of evaluating for ourselves the claims being made about the 2021 plans. Other than brief public sections that are deliberately high-level, all 165(d) resolution plans are confidential supervisory information.
In any case, taking the statements at face value, what exactly do they mean? For example, if there were significant inconsistencies in “amount and nature of information” provided in response to critical aspects of the rule, but yet no domestic Triennial Full Filer’s plan drew a finding of a deficiency or even a shortcoming, why was this level of inconsistency a problem?
Or, for the firm(s) with overly optimistic assumptions, what made these assumptions overly optimistic, but not so overly optimistic as to draw a finding of a shortcoming, as happened to one foreign bank last year?
The agencies in 2019 adopted a revised 165(d) rule that was, among other things, supposed to provide “a clearer articulation of the standards the agencies apply in identifying deficiencies and shortcomings.” Notwithstanding their best intentions, with nearly every release since then the agencies have made things less clear.4
What Resolution Strategy Do the Agencies Want U.S. Regionals to Adopt?
Toward the beginning of the proposed guidance the agencies repeat their mantra that they “do not prescribe a specific resolution strategy for any covered company, nor do the agencies identify a preferred strategy.” To that end, the new proposed guidance for domestic Triennial Full Filers includes guidance applicable to domestic firms that have adopted an SPOE strategy or, in the alternative, guidance for domestic firms that have adopted an MPOE strategy.
But to be clear, all domestic firms on the receiving end of this guidance are currently in the latter category. See page 8 (“All of the specified firms presented an MPOE strategy in their 2021 targeted resolution plan submissions”) and see also page 27 (“There are currently no domestic triennial full filers utilizing a SPOE strategy.”).5
So why then include detailed guidance in the proposal that would apply to the empty set of domestic Category II or Category III firms that have adopted an SPOE strategy? One answer is simply that this is consistent with the agencies’ professed agnosticism as to resolution strategy and so this builds flexibility into the guidance if in the future a firm decides to change its strategy, or if a new firm becomes subject to the 165(d) rule and adopts an SPOE strategy.
That is possibly the best explanation, but other explanations might also come to mind. They do for FDIC Vice Chairman Travis Hill:
[W]hile the proposals explicitly state that the agencies do not favor single point of entry (SPOE) over MPOE, most of the provisions are focused on SPOE firms. At the same time, we are also proposing a rule that would require long-term debt to be issued from the holding company at each of these firms. Given that not a single domestic firm in scope has adopted an SPOE strategy, it would be natural to wonder if the agencies intend to push Category II and III firms to an SPOE strategy. After more than a decade into resolution planning, it is worth considering whether the FDIC, as the entity ultimately responsible for determining how a bank will be resolved, along with the Federal Reserve, should decide in a clear and transparent manner whether and when institutions need to adopt an SPOE strategy. Conversely what the agencies should not do is spend more than a decade approving an MPOE strategy for each of these firms, put out guidance that expressly states the agencies do not have a preferred strategy, and then without warning find the plans not credible because of doubts about the MPOE strategy.
Lessons Were Learned, But What Were They?
In the proposed domestic guidance, the agencies say that the proposal reflects their recent experience with SVB, Signature Bank and First Republic, all of which demonstrate that the failure of a large IDI may have serious adverse effects on U.S. financial stability.
The proposed FBO guidance makes a similar point, while adding in that the guidance also reflects the agencies’ recent experience with UBS’s acquisition of Credit Suisse and the “events leading to” that acquisition.
Neither point is ever returned to in the respective proposals, however, so a reader is left to guess what specifically has been included in the proposal (or what has changed from guidance in the works prior to the recent bank failures) based on those experiences. This missing link between lessons learned and actions taken is perhaps most obvious in the FBO guidance, as discussed below.
Why Base Significant Portions of the New FBO Guidance on the Proposed 2020 Guidance, Rather Than Its Finalized Version?
In early 2020 the Board and FDIC proposed resolution planning guidance for those foreign banking organizations that, under the agencies’ tailoring rules at least, were at the time regarded as posing the greatest amount of systemic risk. That guidance was finalized in December 2020 and, compared to the proposed guidance, walked back several elements of the proposal. For example:
RCAP. The agencies deleted from the final 2020 FBO guidance supervisory expectations relating to positioning of capital, saying that “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.”
RLAP. The agencies also deleted from the final 2020 FBO guidance supervisory expectations relating to positioning of liquidity, saying that this was made unnecessary by “the Specified FBOs' relatively simple U.S. legal entity structures and reduced risk profiles.”
Separability. The agencies observed that “the separability options within the United States are few and that their inclusion in resolution plans has yielded limited new insights.” In light of this, and given that the agencies “expect that such information is obtainable through international collaboration with home country regulators,” the agencies deleted separability expectations from the final 2020 FBO guidance.
The proposed guidance would, without explanation, reverse all of these decisions. The agencies say only that the proposed guidance is “is generally based on the 2020 FBO Guidance or the associated proposal” without explaining for the latter sections why they have now concluded that they now like the 2020 proposal better than the final 2020 guidance.
On separability, for example, what about the agencies’ experience in dealing with the sale of Credit Suisse to UBS made them think that, contrary to what they concluded in 2020, separability analysis from Credit Suisse in its 2021 plan would have yielded meaningful information? Or is the change in circumstance more that, contrary to 2020 expectations, the agencies were not in fact able to obtain appropriate information from Swiss home country regulators? In either case, an important thing to discuss.
Or, to take another example not mentioned above, the agencies in 2020 decided not to include anything in the final guidance on the interaction between a foreign banking organizations’ group resolution plan and its U.S. resolution plan. The underlying tension here is that, by statute, foreign banking organizations must contemplate a resolution of their U.S. operations under the U.S. bankruptcy code or other applicable laws, even if those foreign firms have developed with their home country supervisor a group resolution plan that envisions an SPOE strategy without the firm’s U.S. material entities entering resolution. The agencies in 2020 determined that their supervisory expectations for how this tension should be addressed were already included in the rule itself, and so further expectations with respect to group resolution plan/U.S. resolution plan interaction in the guidance were unnecessary.
Today’s proposal takes the opposite approach. For example, the proposed guidance would require that, “[t]o the extent that the Plan relies on different assumptions, strategies, and capabilities, such as those used to project liquidity needs in resolution, from those necessary to execute the global strategy, the Plan should include a description of such differences.” A reasonable idea for sure, but is this something that proved to be a problem in the UBS-Credit Suisse situation, or is this just a more general piece of advice that the agencies thought would be helpful to add to the guidance? The proposal does not say.
As stressed above, the point of this post is not to say that the choices made by the agencies are definitively wrong, but if the UBS-Credit Suisse deal (or any of the U.S. domestic bank failures) provided insights to the agencies on these points, a clearer explanation would have been welcome.
Elsewhere
This is the second in what was intended to be a series of three posts today. The first, on the agencies’ long-term debt proposal, was published earlier today and is available here. A third post on the FDIC’s proposed changes to its IDI plan rule will be published … sometime.
Thanks for reading! Thoughts, criticisms, etc. may be emailed to bankregblog@gmail.com
For example, on the IDI considerations added to the proposed guidance, and on the least-cost analysis in particular, Governor Bowman today in her dissenting statement questioned whether the degree of specificity included by the agencies is sufficient:
… I would like to better understand whether the guidance provides sufficient detail about the agencies' expectations, and I encourage commenters to address this issue. For example, the guidance contemplates that these firms should include a least-cost resolution analysis in their resolution plans. Is there sufficient information available to financial institutions to effectively evaluate whether a proposed resolution plan would satisfy this test? If the agencies expect firms to demonstrate compliance with opaque concepts like the least-cost test, more information about the test and how the FDIC applies this test should be available to firms subject to the guidance. I look forward to receiving comments on this area of the guidance.
Equal time: https://bpi.com/it-was-the-least-they-could-do-no-literally-it-was-the-least-they-could-do/
Truist was at the time on a September rather than December filing schedule and so got its own separate letter with very slightly different phrasing (“the Agencies have noted areas where further progress is needed to improve the preparation…”).
For instance, the 165(d) rule says that a deficiency is a “weakness that individually or in conjunction with other aspects could undermine the feasibility of” a resolution plan.” The agencies last year, however, found that a plan submitted by a U.S. GSIB, in their view, had issues that “could undermine the feasibility of” the plan, but nonetheless the agencies did not find a deficiency, instead opting for a finding of a shortcoming.
Page 7 of the domestic guidance proposal has a sentence saying that some specified firms have adopted SPOE strategies while others have adopted MPOE strategies, but I assume this is a sentence that accidentally was carried over from the FBO proposal, where that statement is true for specified FBOs.