The first resolution plans – or “living wills” – required under the Dodd-Frank Act have been filed with the FDIC and the Federal Reserve. Nine major U.S. bank holding companies and non-U.S. banks regulated as bank holding companies submitted plans to the Federal Reserve and the FDIC.1 Each plan includes a publicly available summary, which the FDIC has made available on its website.2 The publicly available portion of each resolution plan contains only a very small portion of the information contained in the plan, and is not required to contain most of the most sensitive information. The publicly available portions nonetheless may provide some limited insight into the strategies that large banks believe will be useful in ensuring the orderly resolution of a failed systemically significant financial company and ending “too big to fail”.
DODD-FRANK RESOLUTION PLANS
One significant component of Dodd-Frank’s framework for ending “too big to fail” is the requirement, in Section 165(d), that all major bank holding companies and designated non-bank financial companies prepare and file “resolution plans”.3 These plans are required to describe the covered company’s plan for “rapid and orderly resolution” in the event of material financial distress or failure. For purposes of these plans, that resolution is assumed to occur under the Bankruptcy Code rather than under the special resolution procedure provided in Title II of Dodd-Frank, even though it is highly likely that each of these nine companies would be resolved under Title II.
Under Section 165(d), the plan must include information regarding the manner and extent to which insured depository institution affiliates of the company will be adequately protected from the risks arising from nonbank subsidiaries of the company; provide a full description of the ownership structure, assets, liabilities, and contractual obligations of the company; identify any cross-guarantees and major counterparties, and a process for determining to whom the collateral of the company is pledged; and any other information that the Federal Reserve and the FDIC jointly determine. The rules adopted jointly by the Federal Reserve and the FDIC to implement this requirement were published in the Federal Register on November 1, 2011.4 The Federal Reserve and the FDIC are required to review each resolution plan filed, and to notify the filing institution of any deficiencies found in the plan. If, after the submission of a revised resolution plan addressing any such comments, the plan is found to be “not credible” by the Federal Reserve and the FDIC, then the Federal Reserve and the FDIC may jointly impose increasingly stringent capital, leverage, or liquidity requirements on the filing company, or restrict the growth, activities, or operations of the company or any of its subsidiaries, until a satisfactory plan has been submitted. If the company does not file a satisfactory plan within two years of receiving the regulators’ comments on its plan, then the Federal Reserve and the FDIC may jointly require the company to divest assets or operations identified by the Federal Reserve and the FDIC in order to facilitate an orderly resolution of the company under the U.S. Bankruptcy Code, in the event of the failure of the company.
Separately, the FDIC adopted rules requiring resolution plans by insured depository institutions with $50 billion or more in assets.5 This rule “is intended to complement the resolution plan requirements of the Dodd-Frank Act”,6 and imposes requirements on covered banks that, in general, are parallel to those of the joint Section 165(d) resolution plan rule, with some modifications addressed to banks specifically. Of the initial filers, five submitted plans for both their holding companies under the Section 165(d) requirement and for one or more of their subsidiary banks under this separate FDIC requirement.
Each rule requires the submission of an initial resolution plan, followed by annual updates to the plan. In addition, the regulators may require additional interim updates. To avoid the need to review plans for all covered companies and banks simultaneously, the Federal Reserve and the FDIC adopted a phased-in filing deadline. The first round of plans, filed on July 1st, was required to be filed by covered companies with $250 billion or more in total nonbank assets (or, for a foreign-based covered company, $250 billion or more in total U.S. nonbank assets). As a practical matter, these are companies with large broker-dealer operations. The second round of plans, from covered companies with $100 billion or more in nonbank assets (or $100 billion or more in total U.S. nonbank assets) will be due on July 1, 2013.7 Companies with assets of less than $100 billion (or less than $100 billion in total U.S. nonbank assets) will be required to file their initial reports by December 31, 2013. A company that becomes subject to the rule after its effective date – i.e., nonbank financial companies that are designated by the FSOC under Title I of the Dodd-Frank Act and companies that grow past the $50 billion threshold – must file its initial plan by July 1 of the year following the date on which it becomes a covered company.8
The informational requirements of both rules are extensive, including a strategic analysis describing the covered company’s plan for rapid and orderly resolution in the event of material financial distress or failure of the covered company, including extensive detail regarding the assumptions underlying the analysis; corporate governance; organizational structure and related information; management information systems; interconnections and interdependencies among the covered company and its subsidiaries; and supervisory and regulatory information. The plan must identify the “core business lines”9 and “critical operations”10 of the company, and how those businesses and operations would be preserved, sold or wound down in an orderly manner. The content of the first round of plans was the subject of extensive discussions between the regulators and each of the companies preparing an initial plan, resulting in a “table of contents” that each institution was ultimately required to use to order the information it presented.
The public portion of the plan is required to provide an executive summary of the resolution plan, addressing the following topics:
- The names of material entities;
- A description of core business lines;
- Consolidated or segment financial information regarding assets, liabilities, capital and major funding sources;
- A description of derivative activities and hedging activities;
- A list of memberships in material payment, clearing and settlement systems;
- A description of foreign operations;
- The identities of material supervisory authorities;
- The identities of the principal officers;
- A description of the corporate governance structure and processes related to resolution planning;
- A description of material management information systems; and
- A description, at a high level, of the covered company’s resolution strategy, covering such items as the range of potential purchasers of the covered company, its material entities and core business lines.
Each of the publicly available portions of the plans filed by July 1 addressed each of these topics. Most of the information, however, is not particularly revealing, as it appears to be derived from other publicly available documents issued by the relevant entities (in some cases, in somewhat greater detail). Nonetheless, some aspects of the filings may be notable:
- Some of the plans describe how the banking institutions’ operations are organized to ensure separability of their businesses and continuity of services through the use of such elements as service companies to hold facilities and personnel.
- The plans do refer, in general terms, to strategies involving sales of significant business units.
- Although, as mentioned, the plans are required to demonstrate the resolvability of the relevant institution under the Bankruptcy Code, two of the plans11 also make explicit reference not only to Title II but to the FDIC’s proposed “recapitalization” approach under Title II. This approach is intended to ensure that the systemic disruption and economic waste of a liquidation are mitigated as much as possible by preserving the core businesses and critical operations of a failed SIFI as a going concern without the need for extraordinary taxpayer funding, while ensuring that losses are borne appropriately by shareholders and unsecured creditors, as required by Dodd-Frank.
- It is possible that the comments from the agencies and responsive revisions, part of the contemplated interactive process to lead to “credible” plans, may narrow some of the variation in the initial submissions.
Although the publicly available portions of the plans are written at a very high level, and substantial portions reflect information already in the public domain, they may provide some guidance to companies in the second and third rounds of filings as to how to begin to organize and develop their efforts.