On March 29, 2011, the FDIC released a joint Notice of Proposed Rulemaking (NPR) with the Federal Reserve for implementing the resolution plan and credit exposure report requirements of Section 165 of the Dodd-Frank Act (the Act). The NPR applies to “Covered Companies.” Covered Companies include bank holding companies with total consolidated assets of $50 billion or more and systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve under Section 113 of the Act. Covered Companies also include any foreign bank or company that is or is treated as a bank holding company under Section 8(a) of the International Banking Act of 1978 and that had $50 billion or more in total consolidated assets, as determined based on the foreign bank’s or company’s most recent annual 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. The NPR implements requirements for Covered Companies to periodically report (i) the plans of such companies for rapid and orderly resolution in the event of material financial distress or failure and (ii) the nature and extent of credit exposures of such companies to significant companies1 and the nature and the extent of the credit exposures of significant companies to such Covered Companies. The NPR can be found at http://www.fdic.gov/news/board/29Marchno4.pdf.

FDIC Chair Sheila Bair has recently stated: “Let’s be clear: We will require these institutions [Covered Companies] to make substantial changes to their structure and their activities if necessary to ensure orderly liquidation. ... Preparing sensible plans will require a careful balance among the pursuit of profitable operation of the enterprise, meeting the needs of the economy for efficient intermediation, and providing an effective path to resolution.”

Orderly Resolution Plans

The NPR requires Covered Companies to submit an initial resolution plan, or “living will,” to the Federal Reserve and the FDIC within 180 days of the effective date of a final rule or within 180 days of becoming a Covered Company. The resolution plan must contain the following information:

  • an executive summary describing the key elements of the Covered Company’s strategic plan for rapid and orderly resolution in the event of material financial distress at or failure of the Covered Company
  • a strategic analysis describing the Covered Company’s plan for rapid and orderly resolution
  • a detailed description of a Covered Company’s corporate governance relating to resolution planning
  • a detailed description of the Covered Company’s organizational structure
  • a detailed inventory and description of the Covered Company’s key management information systems and applications
  • a mapping of the interconnections and interdependencies among the Covered Company and its material entities
  • supervisory and regulatory information, and
  • contact information for a senior management official at the Covered Company responsible for serving as a point of contact regarding the resolution plan.

In addition to filing an initial resolution plan, the NPR requires a Covered Company to submit a new resolution plan no later than 90 days after the end of each calendar year. A Covered Company will also be required to file an updated resolution plan within a time frame established by the Federal Reserve or the FDIC, but no later than 45 days, after any event, occurrence, change in conditions or circumstances or change which results in, or could reasonably be foreseen to have, a material effect on the resolution plan of the Covered Company.

Pepper Points: Given the issuance of this NPR, companies that could be Covered Companies now have guidance as to what they will need to include in their resolution plans. The resolution plan is to be dynamic and an iterative annual ongoing process with the regulators. The theme of the NPR is that if an enterprise cannot be resolved in a bankruptcy-like process, the enterprise should be downsized. The regulators require an enterprise’s board and executive officers to understand and plan risk mitigation strategies for all business lines including counterparty exposure. Regulators are particularly focused on multinational organizations and enterprises may need to examine whether additional subsidiaries need to be created to enable a future liquidation, so that a business line is clearly associated with a legal entity.

Pepper Points: Companies that could potentially be designated as Covered Companies should review the NPR and begin contemplating resolution plans before a final rule is issued so that they will be able to comfortably be in compliance with the final rule and the Act within the designated time frame.

Credit Exposure Reports

The NPR requires Covered Companies to submit credit exposure reports quarterly. Covered Companies must submit such credit exposure reports to the Federal Reserve and the FDIC no later than 30 days after the end of each calendar quarter. The NPR indicates that the credit exposure reports must contain:

  • the aggregate credit exposure associated with all extensions of credit, including loans, leases, and funded lines of credit
  • the aggregate credit exposure associated with all committed but undrawn lines of credit
  • the aggregate credit exposure associated with all deposits and money placements
  • the aggregate credit exposure associated with all repurchase agreements (on both a gross and net basis) between the Covered Company and its subsidiaries and each significant company and its subsidiaries
  • the aggregate credit exposure associated with all reverse repurchase agreements (on both a gross and net basis) between the Covered Company and its subsidiaries and each significant company and its subsidiaries
  • the aggregate credit exposure associated with all securities borrowing transactions (on both a gross and net basis) between the Covered Company and its subsidiaries and each significant company and its subsidiaries
  • the aggregate credit exposure associated with all securities lending transactions (on both a gross and net basis) between the Covered Company and its subsidiaries and each significant company and its subsidiaries •the aggregate credit exposure associated with all guarantees, acceptances, or letters of credit (including endorsement or standby letters of credit) issued
  • the aggregate credit exposure associated with all purchases of or investments in securities issued by each significant company or its subsidiaries by the Covered Company and its subsidiaries
  • the aggregate credit exposure associated with all counterparty credit exposure (on both a gross and net basis) in connection with a derivative transaction between the Covered Company and its subsidiaries and each significant company and its subsidiaries
  • a description of the systems and processes that the Covered Company uses to aggregate the data underlying the credit exposure report
  • the credit exposure associated with intra-day credit extended by the Covered Company to each significant company and its subsidiaries during the prior quarter, and
  • any other transactions that result in credit exposure that the Federal Reserve, by order or regulation, determines to be appropriate.

Pepper Points: Companies that believe they will be designated as Covered Companies should begin implementing policies and procedures to prepare credit exposure reports. Potential Covered Companies should also designate employees to be responsible for producing credit exposure reports and ensuring that all required information is contained in such reports.