On October 3, 2011, the Financial Stability Board (the "FSB")1 announced that it had approved "the package of policy measures to be submitted to the G20's November summit to address the 'too big to fail' problems" posed by systemically important financial institutions ("SIFIs"). Among other things, the FSB package of policy measures will include:
- Key attributes of effective resolution regimes for financial institutions, which will form a new international standard for the features all national regimes should have to enable failing financial institutions to be resolved safely and without exposing the taxpayer to the risk of loss
- A requirement that SIFIs, on an individual basis, that are determined to be globally important SIFIs ("G-SIFIs") have recovery and resolution plans, informed by resolvability assessments, and that home and host authorities develop institution-specific cooperation agreements and cross-border crisis management groups
- Additional loss absorbency requirements for those banks determined to be G-SIFIs, based on the methodology developed by the Basel Committee on Banking Supervision for assessing the global systemic importance of banks
- Measures to enhance the intensity and effectiveness of supervision, in particular of SIFIs, including improving the data systems for risk management at SIFIs and assessments of the adequacy of supervisory resources
- The enhancement of international standards for the robustness of core financial market infrastructures
This package of policy measures provides further guidance on the Consultative Document on Effective Resolution of Systemically Important Financial Institutions (the "Consultative Document") issued by the FSB on July 19, 2011. The Consultative Document was designed to propose policy measures to improve the capacity of authorities to resolve SIFIs without systemic disruption and without exposing the taxpayer to the risk of loss. Long before the issuance of the Consultative Document and the October 3, 2011 recommendations of the FSB, the UK had already moved to require recovery and resolution plans2 to resolve UK SIFIs and the US had already moved to require resolution plans to resolve US SIFIs. In the UK and in the US, these plans are often referred to as "Living Wills."
Living Wills in the UK
The Banking Act 2009 created a Special Resolution Regime ("SRR") giving the Financial Services Authority (the "FSA"), the Bank of England and the UK Treasury various tools for resolving failed deposit-taking financial institutions. However, the UK authorities require detailed knowledge and understanding of a financial institution's business to exercise the SRR tools and enable the orderly resolution of a failed financial institution without relying on taxpayer support. Using powers given to it under the new Financial Services Act 2010, the FSA is currently consulting firms and interested parties on proposals for certain financial services firms to prepare and maintain Recovery and Resolution Plans ("RRPs") and, in addition, for firms holding client money and assets to develop client asset resolution plans ("CASS RP") to promote swift return of clients' money and custody assets ("CMA") should they fail. Some firms will have to prepare RRPs and CASS RRPs; smaller firms with CMA will only have to prepare CASS RRPs.
Due Dates for Living Wills in the UK
FSA will publish final rules in the first quarter of 2012. Certain rules will come into effect during the first quarter of 2012, but FSA will also provide transitional rules so firms will have until June 2012 to prepare their first RRPs.
Living Wills in the US
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act3 ("Dodd-Frank"). 12 U.S.C. 5365(d) (commonly referred to as "Section 165(d)") of Dodd-Frank requires US SIFIs to file Living Wills. To implement the requirements of Section 165(d), on September 13, 2011, the Federal Deposit Insurance Corporation (the "FDIC") issued a final rule4 (the "FDIC Final Rule"). In response to comments, the proposed rule5 regarding Living Wills required by Section 165(d) was substantially changed by the FDIC Final Rule.6 Similarly, on October 17, 2011, the Federal Reserve approved the FDIC Final Rule. Collectively, the Federal Reserve's final rule and the FDIC Final Rule are referred to as the FDIC Final Rule.
In addition, on September 13, 2011, the FDIC also approved an interim final rule7 (the "Interim Final Rule"), which was proposed by the FDIC on May 17, 2010, that requires covered insured depository institutions with US$50 billion in total assets ("CIDIs") to submit to the FDIC periodic contingency plans for their resolution in the event of a failure. The Interim Final Rule,8 which is effective January 1, 2012, is designed to complement the FDIC Final Rule. The FDIC Final Rule requires a Living Will to help resolve US bank holding companies under Title 119 of the US Code. The Interim Final Rule requires a Living Will to help the FDIC resolve a CIDI under the FDIA.10 The time frames for filing CIDI Living Wills with the FDIC are the same11 as the time frames for filing SIFI Living Wills and the intent of the FDIC is to have the filing of the CIDI resolution plan correspond to the filing of the SIFI resolution plan. Moreover, the CIDI resolution plan may incorporate data and other information directly from the SIFI resolution. The Interim Final Rule seeks comment on 17 wide ranging questions raised by the FDIC on the scope, definitions, strategic analysis, governance, informational elements and process of the Interim Final Rule. This means that the Interim Final Rule may change after the comment period is closed on November 21, 2011 and the FDIC takes the comments into account.
Due Dates for Living Wills in the US
Rather than require all US SIFIs to submit Living Wills at the same time, as was originally proposed by the FDIC and the Federal Reserve, the FDIC Final Rule requires a staggered process primarily based upon the amount of nonbank assets held by the US SIFI. US SIFIs will now be placed in one of three groups commencing with the SIFIs with the most nonbank assets. The rationale for the three groups is to allow the regulatory agencies to focus first on the largest and most complex US SIFIs and to gain experience that may be used in assessing the Living Wills of the other two groups. The Federal Reserve and the FDIC have indicated publicly that Group I Living Wills will allow them to gain knowledge that they will use to help evaluate Group II and Group III Living Wills. It is likely that the FDIC and the Federal Reserve consulted with the UK supervisory agencies because the Living Wills filing dates for UK SIFIs and US SIFIs are very close in time.12
Group I,13 whose Living Wills are due on July 1, 2012, includes US bank holding companies (and foreign banking organizations ("FBOs"), limited to the US nonbank assets) with at least US$50 billion in consolidated assets which also have US$250 billion or more in nonbank assets, and any organization designated as a SIFI by the Financial Stability Oversight Council (the "FSOC"). Some of the financial institutions in Group I include Bank of America Corporation, JPMorgan Chase & Co., Citigroup Inc., The Goldman Sachs Group, Inc. and Morgan Stanley. Group II,14 whose Living Wills are due on or before July 1, 2013, includes US bank holding companies (and FBOs, limited to US nonbank assets) with at least US$50 billion in consolidated assets which are not included in Group I and also have US$100 billion or more in nonbank assets, and any organization designated as a SIFI by the FSOC. Group III,15 whose Living Wills are due on or before December 31, 2013, includes all US SIFIs not in Group I or Group II with less than US$100 billion in nonbank assets. Most US SIFIs that are US branches and agencies of international banks are likely to be in Group III because the initial focus of the Federal Reserve and the FDIC is on US nonbank assets rather than either US bank assets or global nonbank assets. A US SIFI with less than US$100 billion in nonbank assets and total insured depository institution assets that comprise at least 85% of the US SIFI's total consolidated assets may file a tailored plan16 that focuses on nonbank operations. A company that becomes a SIFI after the effective date of the FDIC Final Rule must submit its Living Will by the July 1, 2012 following the date on which the company becomes a SIFI if that date is at least 270 days after the date on which the company becomes a SIFI.17
The FSOC has not yet designated any SIFI. However, on October 11, 2011, the FSOC issued a second notice of proposed rulemaking and interpretive guidance with a request for public comment18 (the "FSOC Proposed Rule"). The FSOC Proposed Rule clarifies the process the FSOC will use to designate nonbank financial companies19 as SIFIs. Under Section 11320 of Dodd-Frank, the FSOC designation means these SIFIs will be subject to prudential standards (e.g., enhanced supervision and regulatory standards) and supervision by the Federal Reserve. Due to the size of these SIFIs, the Federal Reserve is likely to have a core staff of examiners located onsite at the SIFI's main office, and those examiners will effectively conduct inspections and examinations of areas of the SIFI on each business day. It is possible that the FDIC will also have onsite examiners at the location. Federal Reserve examiners will require substantial recordkeeping, report filing, policy development, staffing and systems upgrades. The Federal Reserve is also likely to require enhanced internal controls, expanded compliance structures, more focused risk management and a wider scope of audits. Since the examiners will be onsite, these SIFIs will likely receive a consistent dose of corrective action letters and examinations that are much tougher than any audit undertaken at the SIFI prior to the SIFI designation. All of this means that the cost of the SIFI designation (i.e., the enhanced supervision, the increased capital and liquidity requirements and other requirements of the Federal Reserve and the FDIC) will be in the millions of dollars. For some companies, particularly those companies without central operations and integrated systems, the cultural and budgetary shock to the company will be extreme. Examiners are likely to criticize these companies for having "silos" that produce risk management gaps. The solutions to these gaps are usually increased staff, upgraded systems, stronger internal controls, changes to corporate governance, and enterprise-wide policies and procedures. These companies are likely to be asked to dramatically increase their expenses at the same time that demand for their products is weak.
In determining whether to designate a company as a SIFI, Dodd-Frank and 12 C.F.R. 1310.11(a)21 require the FSOC to take into account 11 factors:
- The extent of the leverage of the company and its subsidiaries
- The extent and nature of the off–balance-sheet exposures of the company and its subsidiaries
- The extent and nature of the transactions and relationships of the company and its subsidiaries with other significant nonbank financial companies and significant bank holding companies
- The importance of the company and its subsidiaries as a source of credit for households, businesses, and state and local governments and as a source of liquidity for the US financial system
- The importance of the company and its subsidiaries as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities
- The extent to which assets are managed rather than owned by the company and its subsidiaries, and the extent to which ownership of assets under management is diffuse
- The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company and its subsidiaries
- The degree to which the company and its subsidiaries are already regulated by one or more primary financial regulatory agencies
- The amount and nature of the financial assets of the company and its subsidiaries
- The amount and types of the liabilities of the company and its subsidiaries, including the degree of reliance on short-term funding
- Any other risk-related factors that the FSOC deems appropriate either by regulation or on a case by case basis
These statutory requirements proved to be unhelpful in predicting which companies might be designated by the FSOC. On October 6, 2010, the FSOC issued an advance notice of proposed rulemaking and on January 26, 2011, the FSOC issued a notice of proposed rulemaking, each of which was designed to provide guidance on how the SIFI determinations would be made. The notices were criticized as simply a restatement of the statutory requirements. The FSOC Proposed Rule is designed to address that criticism. Indeed, during testimony before the US Congress on October 6, 2011, US Secretary of the Treasury Timothy Geithner indicated that, after the October 11, 2011 meeting of the FSOC, the FSOC would issue further clarifying guidance that would help nonbank financial institutions better understand the factors that the FSOC will employ in determining whether a particular nonbank financial institution will be designated a SIFI. Secretary Geithner was referring to the FSOC Proposed Rule.
In the Appendix to the FSOC Proposed Rule, the FSOC further explained that it will use a three-stage process to make a determination on its designations. The first stage is a strictly quantitative test designed to identify the companies most likely to satisfy one or more of the determination standards. The second stage is designed to analyze and prioritize those companies identified in the first stage. Following the second stage, the actual companies that are selected for further review will be notified that they are being considered for designation. It is likely that public companies will disclose this information in their financial reporting to the SEC in the same way that they disclose governmental investigations. The third stage is designed to have the companies go through an in-depth evaluation of information provided by the company and information compiled by the FSOC. Though the FSOC may make a designation at any stage, it is likely that determinations will be made after the third stage. If a company is designated, then the company may request a hearing to challenge the designation. If the FSOC is unable to make a determination, the FSOC may request the Federal Reserve to conduct an examination of the company and its subsidiaries for the sole purpose of determining whether the company should be supervised by the Federal Reserve. Similarly, the FSOC may, on its own initiative or at the request of the Federal Reserve, require the financial activities of a company to be supervised by the Federal Reserve and subject to prudential standards if the FSOC determines that a material financial distress related to, or the nature, scope, size, scale, concentration, interconnectedness, or mix of, the financial activities conducted directly or indirectly by the company would pose a threat to the financial stability of the US, based upon the statutory factors, and the company is organized or operated in such a manner as to evade the application of Title I of Dodd-Frank.
During the first stage, the FSOC will look for six thresholds and an initial determination will be made if the company meets the total consolidated asset threshold plus one of the other thresholds:
- Total Consolidated Assets. US$50 billion in global total consolidated assets for US nonbank financial companies or US$50 billion in US total consolidated assets for foreign nonbank financial companies
- Credit Default Swaps Outstanding. US$30 billion in gross notional credit default swaps outstanding for which a nonbank financial company is the reference entity
- Derivative Liabilities. US$3.5 billion of derivative liabilities
- Loans and Bonds Outstanding. US$20 billion of outstanding loans borrowed and bonds issued.
- Leverage Ratio. Minimum leverage ratio of total consolidated assets (excluding separate accounts) to total equity of 15 to 1
- Short-Term Debt Ratio. Ratio of debt with a maturity of less than 12 months to total consolidated assets (excluding separate accounts) of 10 percent
The proposed joint rule initially issued by the FDIC and the Federal Reserve would have required a SIFI to file a new Living Will when certain material events occurred. The FDIC Final Rule, however, reduces this burden and only requires each SIFI to file a notice22 with the FDIC and the Federal Reserve within a time frame specified by the FDIC and the Federal Reserve (but not later than 45 days) after any event, occurrence, change in conditions or circumstances or other change that results in, or could reasonably be foreseen to have, a material effect on the Living Will. The notice must identify any material event significant enough to merit modification of the Living Will. The SIFI must then revise the Living Will to take that event into account in the submission of the next annual Living Will. Any event that renders the Living Will ineffective, in whole or in part, is a material event.
Who is covered in the UK?
The RRP requirements will apply to the following:
- All FSA-authorised banks and building societies regardless of size, including UK incorporated subsidiaries of overseas banks
- Significant investment firms authorised by FSA, specifically full scope BIPRU 730k investment firms (firms with authority to deal on own account) with assets exceeding £15 billion
The CASS RP requirement will apply to all firms subject to the FSA's client asset custody rules (CASS 6) and investment business client money rules (CASS 7). So some banks and significant investment firms may not need to also prepare a CASS RP. The FSA is not calling for RRPs from UK branches of overseas entities, partly because the SRR tools are unavailable to resolve branches of overseas banks.
Who is covered in the US?
Pursuant to 12 C.F.R. 381.2(f), US SIFIs will include:
- US bank holding companies with at least US$50 billion in consolidated assets (as determined based upon the average of the company's four most recent Consolidated Financial Statements for Bank Holding Companies as reported on the Federal Reserve's Form FR Y-9C)
- US branches and agencies of international banks, where the consolidated worldwide assets of the international bank is at least US$50 billion (as determined based upon the foreign bank's or company's most recent annual report or, as applicable, the average of the four most recent quarterly Capital and Asset Reports for Foreign Banking Organizations as reported on the Federal Reserve's Form FR Y-7Q)
- Any nonbank financial company designated as a SIFI by the FSOC pursuant to Section 113 of Dodd-Frank
According to the Federal Reserve, there were 34 US bank holding company SIFIs as of September 30, 2011.23 Likewise, it is estimated that approximately 98 US branches and agencies of international banks will meet the US SIFI definition because of the requirement to look to the consolidated worldwide assets of the head office of the US branch or agency. Thus, the number of SIFIs whose head offices are outside the US is almost three times the number of SIFIs located inside the US.
In addition, US insured depository institutions with at least US$50 billion in assets24 (as determined based upon the average of the CIDI's four most recent Reports of Condition and Income or Thrift Financial Reports) must also file Living Wills. The FDIC estimates that 37 CIDIs are covered by the Interim Final Rule.
What should the UK Living Wills include?
The purpose of a Recovery Plan is to enable firms to plan how they would try to recover from severely adverse conditions that could cause their failure. Firms are responsible for preparing their Recovery Plans which are subject to FSA review and require updating yearly. Ways of rebuilding financial strength include:
- Disposals of businesses or entities
- Raising equity capital when this is not part of the firm's business plan
- Complete elimination of dividends and variable remuneration
- Debt exchanges and other liability management actions
- Sale of the whole firm to a third party
A key aspect is deciding when the firm will carry out its Recovery Plan. Firms will be required to develop their own unambiguous triggers, which may include:
- Invocation of the firm's contingency funding plan
- Negative market sentiment or opinion towards the firm, possibly measured by liquid market-based indicators (e.g., widening of a firm's CDS spread relative to peers, unexpected fall in share price relative to peers, etc)
- An expectation of a drop in a firm's credit rating
- Use of a firm's capital planning buffers ("CPB")
The purpose of Resolution Planning is to provide a strategy to resolve a failed firm or group in a manner that minimises the impact on financial stability without needing to resort to taxpayer support. The UK authorities are responsible for preparing a Resolution Plan, which must allow decisions and actions to be taken and performed in a short space of time (for example, over a 'resolution weekend'). However, firms must provide a Resolution Pack to FSA, which is regularly updated to reflect any material developments in a firm's business. The Resolution Pack must include:
- Details of significant entities in the group and the key structural and operational issues relevant to separating significant legal entities. This will include details of a firm's 20 largest interbank exposures, details of the size of the derivatives and securities financing books and booking and settlement systems, and other economic roles.
- Critical Function Contingency Analysis ("CFCA") covering separation and / or 'controlled wind-down' for each critical role of the firm. FSA will require an uninterrupted stream of service provision for critical roles such as deposit-taking, the payment services offered by providing current accounts or the making of markets critical for the UK financial system to work.
- Plans to overcome any barriers to resolution which the UK authorities consider unacceptable. Resolution may be more difficult depending on where critical roles are within the group; whether the group uses a branch or subsidiary structure; and whether there is co-mingling of economic roles in a single legal entity or if an economic role spans multiple legal entities. Preparative actions might include actions to reduce the riskiness of the firm, such as simplification of intra-group relationships, changes in contractual arrangements, increased stand-alone capacity, changes in corporate structures and operational set-ups to ease separation of certain roles.
CASS Resolution Pack
This aims to reduce the wider economic cost of an in-scope firm failure. It ensures that information and records that would help an insolvency practitioner or resolution authority return client money and custody assets to clients more quickly, will be accessible to the insolvency practitioner or resolution authority after the firm's failure.
What should the US Living Wills include?
At a minimum, US Living Wills must include an executive summary, a strategic analysis, a section covering corporate governance relating to resolution planning, a section covering organizational structure and related information, a section on management information systems, a section covering interconnectedness and interdependencies, a section covering supervisory and regulatory information, and SIFI contact information.25 During the annual stress tests of the US SIFIs, the US SIFIs will be provided different sets of economic conditions under which the stress tests will be conducted (baseline; adverse; severely adverse).26 In preparing Living Wills, US SIFIs may assume that a failure would occur under the baseline economic condition or a reasonable substitute developed by the US SIFI if a baseline economic condition is not then available.27 US Living Wills require the US SIFIs to provide a comprehensive blue print on how to reorganize or liquidate the US SIFI (in the case of a SIFI not incorporated or organized in the US, the subsidiaries and operations of the foreign company that are domiciled in the US will be the focus of the Living Will) in the event of material financial distress or failure. Under 12 C.F.R. 381.2(m), material financial distress means:
- The SIFI has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the SIFI to avoid such depletion;28
- The assets of the SIFI are, or are likely to be, less than its obligations to creditors and others;29 or
- The SIFI is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.30
The Living Wills must be detailed enough to help the resolution authority resolve the US SIFI in a rapid and orderly way if the potential failure of the US SIFI would threaten the stability of the US financial system. To create such a blue print, the US SIFI must analyze the restructuring and insolvency laws in each of the jurisdictions where it has assets and liabilities, account for all of its legal entities and understand how the products and services it offers operate within and across business lines. In addition, the US SIFI must analyze how its businesses and business model will be affected by events that occur at related and unrelated interconnected companies. Equally important, the strategic analysis must identify the range of options and specific actions to be taken by the US SIFI to facilitate a rapid and orderly resolution of the SIFI, its material entities, its critical operations and core business lines in the event of its material financial distress or failure. Under 12 C.F.R. 381.2 (l), a material entity is a subsidiary or foreign office of the SIFI that is significant to the activities of a critical operation31 or core business line. A critical operation is an operation of the SIFI, including associated services, functions and support, the failure or discontinuance of which (in the view of the SIFI or as jointly directed by the FDIC and the Federal Reserve) would pose a threat to the financial stability of the US. A core business line32 is a business line of the SIFI (including associated operations, services, functions and support) that (in the view of the SIFI) upon failure would result in a material loss of revenue, profit or franchise value. A US SIFI may limit its strategic analysis with respect to a material entity that is subject to an insolvency regime other than the US Bankruptcy Code to a material entity that either has US$50 billion or more in total assets or conducts a critical operation so long as the analysis references the applicable regime. Funding, liquidity, support functions and other resources (e.g., capital sources) must be identified and mapped to the SIFI's material entities, critical operations and core business lines. To meet these requirements, many SIFIs will have to establish internal teams that must be supported by a wide range of experts, including lawyers, consultants and other professionals. Depending on the complexity of the SIFI, many experts project that the initial Living Will could take at least nine months to complete. While many believe the estimate of the FDIC and the Federal Reserve to be significantly understated, the FDIC and the Federal Reserve estimate the burden for each SIFI to be 12,400 hours for initial implementation and 2,881 hours annually on an ongoing basis.
US SIFIs in countries outside of the US, where the head office has more than US$50 billion in consolidated assets, but limited US operations, must include in their Living Wills a close analysis of how the Living Will fits within the SIFI's (in this case, the head office SIFI) overall resolution or contingency planning process. All US SIFIs must incorporate resolution planning into their overall business planning processes because such resolution planning is considered to be a precondition for effective crisis management and resolution. The analysis must also include the nature and extent of the head office's related crisis management and resolution planning. The corporate governance structure of the Living Will must include information on how resolution planning is integrated into the corporate governance structure and processes of the US SIFI, and identify the senior management official who is primarily responsible for overseeing the development, maintenance, implementation, and filing of the Living Will and for the US SIFI's compliance with the FDIC Final Rule (as approved by the Federal Reserve). The largest and most complex US SIFIs may be required to establish a central planning function headed by a senior management official who reports to the Chief Risk Officer or the Chief Executive Officer. Periodic reports may also be required to be made to the SIFI's Board of Directors (or, in the case of a foreign banking organization, someone with express delegated authority from the Board of Directors), which must approve the Living Wills, both initially and annually.
The Living Wills must also include the SIFI's overall organizational structure and related information, including a hierarchical list of all material entities, with jurisdictional and ownership information mapped to core business lines and critical operations, and an analysis of the challenges or barriers created by the laws, regulations and policies of different countries. This is a big issue because US laws are typically territorial and so are the laws of many other countries.33 There almost certainly will be many cases where US law addresses the disposition of assets located in the US, where the law of the other country is silent on the disposition of assets located in the US. In other cases, US laws and the laws of other countries may claim a superior right to the same asset. Chapter 1534 of the US Bankruptcy Code may be helpful in providing a forum for resolving those issues, but Chapter 15 is not an answer to this problem. It is also significant that the scope of the US Living Will may require SIFIs to understand and address not just US bankruptcy and other insolvency laws, but also the insolvency laws of other countries where the financial institutions are active or have operations. Outside of the Orderly Liquidation Authority which the FDIC has, but is likely to rarely use, in the US, the most relevant insolvency law for US bank holding companies and unregulated nonbank subsidiaries of the US bank holding companies is the US Bankruptcy Code. In the same vein, the most important insolvency law for insured depository institutions (including FDIC insured branches of international banks) is the FDIA.35 For wholesale branches, and agencies of international banks, that are federally licensed, the most important insolvency law may be the International Banking Act.36 For wholesale branches, and agencies of international banks, that are state licensed, the most important insolvency law may be found in the state banking law.37 The Securities Investor Protection Act is an important insolvency law for US broker dealers,38 and state insurance laws39 are the primary insolvency law for insurance companies.
In many cases, US laws will provide for ring fencing the US assets in a way that makes it extremely challenging for non-US parties to gain access to those assets. This is true even if the FBO takes advantage of Chapter 15 of the US Bankruptcy Code, which is designed to encourage international cooperation on international insolvency matters involving the US. One of the contexts in which this challenge is made clear is in determining the disposition of US correspondent accounts that are owned by non-US financial institutions. In New York, for example, it is not uncommon for the New York branch of an international bank to maintain tens of millions (if not a greater amount) of dollars in accounts where the accountholder is a non-US branch of the head of office. The disposition of these accounts would generate interest both in the US and outside of the US. This is also important because many US branches and agencies of international banks serve as the global US Dollar clearing bank for all of the head office's non-US branches and agencies.
Living Wills must also include information regarding material assets, liabilities, derivatives, hedges, capital and funding sources, major counterparties, and trading, payment, clearing and settlement systems utilized by US SIFIs. Moreover, US SIFIs must provide information on the management information systems supporting its core business lines and critical operations, including legal ownership of the systems and associated software, licenses or other associated intellectual property. In addition, the Living Wills must identify the appropriate regulatory agencies and resolution authorities in those countries and explain how those regulatory agencies and resolution authorities will work together with the US authorities to resolve the non-US operations of the US bank holding company SIFIs and presumably the US operations of the US branches and agencies of international banks.
Public Disclosure of UK Living Wills
There is no suggestion that institutions covered by the UK proposals will have to make any element of their RRPs public. Instead, their regular updates to the plans will form part of the normal regulatory supervisory process.
Public Disclosure of US Living Wills
Living Wills will be treated like confidential Federal banking agency examination and supervisory information and will generally not be subject to public disclosure under the US Freedom of Information Act ("FOIA") because the content of the Living Wills will necessarily contain trade secrets and other confidential supervisory information protected by either or both FOIA exemptions (b) (4) and (b) (8).40 The FDIC Final Rule, however, attempts to balance the need for confidentiality with the public's need for transparency. Thus, Living Wills will contain both a confidential section and a public section, and the public section will be made available pursuant to FOIA and the implementing regulations of the FDIC41 and the Federal Reserve.42 The public section will include an executive summary that describes the business of the SIFI and, to the extent material to an understanding of the SIFI:
- 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 derivatives activity and hedging activity
- 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 principal officers
- A description of the corporate governance structure and processes related to resolution planning
- A description of material management information systems
- A description, at a high level, of the SIFI's resolution strategy, covering such items as the range of potential purchasers of the SIFI, its material entities and core business lines
The UK and the US are well ahead of many other countries in making progress on developing rules and requirements for Living Wills. A close comparison of the Living Wills requirements of the two countries, however, shows that there are significant difference in who is covered, what is to be included in the Living Wills and the information in Living Wills that will be disclosed to the public. In addition, while the UK also requires a SIFI recovery plan, the US does not. While the banking supervisory process is designed to ensure safety and soundness of the operations of financial institutions (including those subject to enhanced or heightened prudential supervision), and state insurance regimes are designed to maintain the solvency of insurance companies, US Living Wills are not designed to insert the government into the day to day operations of companies that do not need to be resolved. Nonetheless, in the US, for companies that are designated by the FSOC as a SIFI (and will be subject to the supervision of the Federal Reserve), the existence of year round onsite examiners, the consistent receipt of supervision guidance, and tough examinations may cause those companies to wonder whether government is encroaching on their day to day operations.