Three Notes on the FDIC’s IDI Resolution Plan Proposal
Also, a VersaBank update
In posts yesterday this blog discussed (1) implications for U.S.-based firms under the Federal Reserve Board/FDIC/OCC long-term debt proposal and (2) a few things in the 165(d) resolution planning guidance jointly proposed by the Board and FDIC that stuck me as underexplained.
This post looks briefly at a development from yesterday not yet addressed on this blog: the FDIC’s proposed revisions to its IDI plan rule.
Three Notes on the FDIC’s IDI Resolution Plan Proposal
The FDIC yesterday proposed to comprehensively revise its resolution plan rule for insured depository institutions. The rule has been around since 2012 and has not itself been amended since then, though the FDIC has at various points stayed or modified its application through announced moratoria, policy statements, etc. Here are three things I thought were interesting on reading through the proposal for the first time.
1. The Proposed Rule Embraces an Optimistic View of the FDIC’s Capacity to Timely Review and Provide Feedback on IDI Plan Filings
Under the proposed rule, 31 insured depository institutions with $100 billion or more in total assets (“Group A IDIs”) would be required to file resolution plans every two years. In off years when not filing resolution plans, the Group A IDIs would be required to file an “interim supplement” updating certain information included in the prior year’s plan.
In addition, 14 insured depository institutions with total assets of $50 billion or more but less than $100 billion (“Group B IDIs”) would be required to make biennial “informational filings.” These informational filings would be comparatively lighter than the resolution submissions required from Group A IDIs but, as FDIC Vice Chairman Hill noted yesterday, would actually be more burdensome (at least in terms of hours required to produce) than current full-scale resolution plans required from IDIs with $100 billion or more in total assets.1
Staggered Filing Cycles
All 31 Group A IDIs would be on a biennial filing cycle, but not all 31 IDIs in this group would file resolution plans in the same year. Instead, the FDIC plans to create two submission cohorts for Group A IDIs, split roughly evenly. The FDIC indicates that the 31 IDIs will be divided between the two cohorts such that firms with “like characteristics” are grouped together, so as to “support horizontal analysis across the submission cohort.”
All 14 Group B IDIs would be in the same filing cohort.
Engagement and Capabilities Testing
In addition to these plan submissions, the FDIC would intend to conduct “engagement” and “capabilities testing” with individual Group A and Group B IDIs. The FDIC defines these terms as follows.
Engagement. Each CIDI must provide the FDIC such information and access to such personnel of the CIDI as the FDIC in its discretion determines is relevant to any of the provisions of this section (“engagement”). Personnel made available must have sufficient expertise and responsibility to address the informational and data requirements of the engagement. Engagement between the CIDI and the FDIC may be required at any time. This engagement may include the FDIC requiring the CIDI to provide information or data to support the content items required by paragraphs (d) or (e) of this section, other information related to a group A CIDI’s identified strategy, or, for any CIDI, other resolution options being considered by the FDIC. Among other subjects, the FDIC may seek information from a group A CIDI on the impact to the identified strategy of a change in economic assumptions or CIDI- specific scenario assumptions.
Capabilities testing. At the discretion of the FDIC, the FDIC may require any CIDI to demonstrate the CIDI’s capabilities described, or required to be described, in the resolution submission, including the ability to provide the information, data and analysis underlying the resolution submission (“capabilities testing”). In connection with capabilities testing, the FDIC may seek information from a CIDI on the impact on identified capabilities of a change in economic assumptions or CIDI-specific scenario assumptions, if applicable. The CIDI must perform such capabilities testing promptly, and provide the results in a time frame and format acceptable to the FDIC. Capabilities testing may be included in connection with any engagement.
As for how frequently this engagement and capabilities testing will take place:
The FDIC expects to engage with Group A IDIs “on a selective basis” but does not expect to do so more than once in a two-year cycle.
The FDIC expects to engage with every Group B IDI in each two-year cycle — this is because Group B filings, unlike those from Group A IDIs, will not include development of an identified resolution strategy and so the FDIC expects engagement with Group B IDIs to “be a key component of its resolution planning for such firms.”
The FDIC expects that capabilities testing “for each Group A and Group B CIDI will occur no more than once per two-year cycle.”
Work Program
Taking the above together, once the rule is fully up and running the FDIC’s IDI resolution plan activities would look something like this:
Year 1:
The FDIC receives resolution plan submissions from 15 or 16 Group A IDIs.
The FDIC also receives informational filings from the 14 Group B IDIs.
The FDIC may engage with Group A and Group B IDIs.
The FDIC may conduct capabilities testing.
Year 2:
The FDIC receives (1) resolution plan submissions from the 15 or 16 Group A IDIs that did not submit resolution plans last year and (2) interim supplements from Group A IDIs that did submit plans last year.
The FDIC “expects that it generally will provide” feedback to Group A IDIs and Group B IDIs within a year of submission, so presumably the IDIs that made submissions in year 1 would receive feedback in year 2.
The feedback letter “could” identify areas of engagement and (for Group A IDIs) capabilities testing.
The feedback letter “may” also include a written notice as to whether the FDIC believes the resolution plan submission was or was not credible, but the FDIC may also choose to “defer that determination under after any engagement and, if applicable, capabilities testing.”
The FDIC may engage with Group A and Group B IDIs.
The FDIC may conduct capabilities testing.
Year 3:
The FDIC receives (1) resolution plan submissions from the 15 or 16 Group A IDIs that did not submit resolution plans last year and (2) interim supplements from Group A IDIs that did submit plans last year.
The FDIC also receives informational filings from the 14 Group B IDIs.
The FDIC may provide feedback to Group A firms that filed last year, or it may not. See above.
The FDIC may engage with Group A and Group B IDIs.
The FDIC may conduct capabilities testing with Group A IDIs.
And so on.
Meanwhile, while all this is going on, the FDIC along with the Federal Reserve Board will also be reviewing 165(d) resolution plans, which under current rules are required every two years from the U.S. GSIBs and every three years from a number of other firms.
The FDIC in the proposal says it has “observed” that requiring annual IDI resolution plans proved “challenging” for both IDIs and the FDIC, in that such a cadence did not provide the FDIC sufficient time to thoroughly review submissions and provide feedback, nor did it provide IDIs time to incorporate that feedback into their next submissions.
A two-year submission cycle (with interim updates in off years), however, is totally different. This, the FDIC believes, will be workable:
[G]oing forward, the FDIC proposes to establish a submission schedule that provides adequate time for review of a submission and the development of feedback; engagement and capabilities testing; and the CIDI’s development of content for the next resolution submission that is responsive to feedback, as well as requiring limited interim supplements to provide timely updates of the most critical information.
Later on, the FDIC explains that it considered sticking with the three-year cycle reflected in the currently applicable policy statement. This would have the benefit of “allow[ing] additional time for engagement and capabilities testing.” The FDIC concludes, however, that this incremental benefit of a longer cycle is outweighed by the “enhanced timeliness” that would come from requiring submissions every two years.
In a slightly different context yesterday, FDIC Vice Chairman Hill called it “continually embarrassing” that the Board and FDIC continue to “demand that banks complete their work in a timely manner yet are repeatedly unable to do so themselves.”
Maybe I am too cynical, but I wonder if the FDIC’s ambitious plans for the frequency of IDI plan submission, review, engagement and capabilities testing will also one day (again) need to be walked back.2
2. Banks Will Be Required to Provide Information on their “Key Depositors”
The proposed rule includes several new requirements in light of the FDIC’s experience in applying the rule, as well as its experience with the recent bank failures. One such new requirement in the proposal is a mandate for IDIs to identify their “key depositors,” defined as those depositors that control the largest deposits that are collectively material to one or more business lines. Each key depositor must be identified by name, line of business, and geographic location, where that information is known.
The proposed definition of key depositors is pretty flexible, although note that the FDIC includes a question asking if a different approach would be better:
The FDIC considered different approaches to defining “key depositors,” including by defining it as the top 100 depositors by size, or as those depositors that collectively represent the largest deposits making up 25 percent of the CIDI’s deposits. Because the appropriate range of metrics varies from CIDI to CIDI based on its size and business model, the proposed rule would provide flexibility to the CIDIs in describing key depositors. Is this definition sufficiently clear and useful? Is there a way to define a CIDI’s key depositors that would provide more useful information to support the FDIC’s understanding of the profile of significant depositors and the impact of different resolution strategies on those depositors?
3. The Proposal Includes a Notable Discussion of the FDIC’s View of the Financial Stability Risk of U.S. GSIBs
Resolution plans filed by IDIs must be credible, as determined by the FDIC in its sole discretion. Under the proposal, the FDIC would adopt a two-pronged definition for when a plan is not credible:
The identified strategy would not provide timely access to insured deposits, maximize value from the sale or disposition of assets, minimize any losses realized by creditors of the CIDI in resolution, and address potential risk of adverse effects on U.S. economic conditions or financial stability; or
The information and analysis in the resolution submission is not supported with observable and verifiable capabilities and data and reasonable projections or the CIDI fails to comply in any material respect with the requirements of [the rule].
The proposal includes a specific discussion of the “adverse effects on U.S. economic conditions or financial stability” element of the first prong in the context of IDI plans filed by the IDI subsidiaries of U.S. GSIBs. I was unsure what to make of it.
First, the FDIC says that U.S. GSIBs are “the U.S. banking organizations that pose the greatest risk to U.S. financial stability.” It then says that IDI plans filed by U.S. GSIB IDI subsidiaries may “have a particular challenge” in addressing the risks their IDI resolution strategy could pose to the U.S. economy and financial stability, given that these firms have developed SPOE resolution strategies in which their IDI subsidiaries remain open and operating.
The FDIC notes, though, that an IDI is permitted to cross-reference information submitted in its parent company’s 165(d) plan. Then the FDIC goes on to say the following:
In addition, where the strategy for the rapid and orderly resolution of a U.S. GSIB in its DFA resolution plan does not include the resolution of the CIDI under the FDIA, that strategy may reasonably be identified as a mitigant to the systemic risk, if any, posed by the failure of the CIDI under the FDIA.
Maybe my brain is mush from reading too much resolution-plan related content over the past 24 hours, but I think this says that, basically, a U.S. GSIB will be allowed to say that the risk to financial stability posed by the failure of its IDI subsidiary is mitigated by the fact that the U.S. GSIB has a plan not to let that IDI subsidiary fail in the first place.
VersaBank
On a subject completely unrelated to resolution planning, this morning VersaBank released its Q3 results. VersaBank is a Canadian bank that since last year has been seeking a U.S. bank charter through the acquisition of a small national bank, Stearns Bank Holdingford N.A.
Three months ago I wrote about how the application process had not progressed as quickly as VersaBank hoped.
June 14, 2022: “Closing of the acquisition, expected before the end of VersaBank's fiscal year (October 31, 2022)...”
August 31, 2022: “The transaction is anticipated to close before December 31, 2022...”
December 7, 2022: “The transaction is anticipated to close in the first half of calendar 2023”
March 8, 2023: “VersaBank anticipates receiving a decision with respect to approval of the proposed application from US regulators during the second calendar quarter of 2023 and, if favourable, will proceed to complete the acquisition as soon as possible...”
June 7, 2023: “The Bank continues to advance the process seeking approval of its proposed acquisition of OCC-chartered US bank, Stearns Bank Holdingford, and expects a decision with respect to approval of its application from US regulators by the end of summer 2023”
Today’s update again pushed back the timeline, now saying that VersaBank “expects a decision with respect to approval of its application from US regulators during autumn 2023.”
As I did back in June, I still assume that things are going to work out okay in the end (with no real basis for this view other than the fact that it usually does). Even so, the lack of alignment between VersaBank’s expectations and the Federal Reserve Board3 and OCC4 review processes continues to be a little weird.
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See footnotes 6 and 7 in Vice Chairman Hill’s remarks.
I think this is clear, but just to stress this is not at all a criticism of the capabilities of the FDIC staff. It is simply a lot of work to do.
This is compounded, too, by something not discussed in the proposal: as described by an OIG report in February 2023 the OIG has identified changes in the FDIC’s workforce as a “Top Challenge” for the FDIC every year since 2019. The 2023 version of the report observes, among other things:
“the FDIC’s ability to execute its mission may be affected by numerous departures of its personnel”
“A total of 21 percent (1,264 individuals) of the FDIC workforce was eligible to retire in 2022 … this figure is significantly higher than the Governmentwide rate of 15 percent. This retirement eligibility figure climbs to more than a third of the FDIC workforce—38 percent (2,215 individuals)—within 5 years (in 2027).”
“In addition, in 2021 and 2022, the FDIC experienced a substantial number of resignations among bank examiners-in-training—at rates greater than pre-pandemic levels.”
“We had previously identified concerns with the FDIC’s management of its employee retention, including a lack of established metrics or indicators to measure the effectiveness of its retention activities or actions for examination staff.”