The FDIC and Federal Reserve Board (“FRB”) have issued regulations that require bank holding companies with assets over $50 billion (including foreign banking organizations (“FBOs”) with US operations) to prepare and submit so-called “living wills” describing how such entities would be resolved under the federal Bankruptcy Code. In addition—and not to be overlooked—the FDIC has issued a companion regulation requiring a depository institution with over $50 billion in assets to prepare a living will detailing the resolution of the depository institution under the receivership authority of the Federal Deposit Insurance Act (the “FDI Act”). Depending upon the size and complexity of covered entities, the regulations establish time frames for submission of a living will—with the largest entities being required to submit by July 1, 2012 and smaller entities being required to submit their living wills by December 2013.
The rules describe and require a comprehensive “mapping” of a covered company’s operations in a manner that arguably will assist the federal government to resolve those companies upon failure. This Alert summarizes the regulatory requirements, and identifies several significant concerns that holding companies and depository institutions must consider when commencing a compliance project.
As a result of the heavily criticized federal assistance provided to large banking organizations in the past few years, Title II of the Dodd-Frank Act adopted provisions that require large institutions to analyze their own depository and non-depository structures and provide detailed information to the FDIC and the FRB to allow those agencies to resolve a failed organization. In what appears to be a statutory approach that acknowledges the possible dual applicability of the federal Bankruptcy Code and the FDI Act, a two-fold approach was adopted for the purpose of drafting so-called “living wills.” First, for holding companies, a living will is required indicating how a holding company would be resolved under the Bankruptcy Code. Second, for depository institutions and their subsidiaries, a living will is required indicating how a resolution would best proceed under the receivership provisions of the FDI Act.
There are several categories of covered financial entities under the regulations, and the specific content of the living will depends upon the size of the entity and its subsidiaries. Those categories are:
- Bank holding companies with non-bank assets greater than $250 billion;
- Bank holding companies with non-bank assets greater than $100 billion but less than $250 billion;
- Bank holding companies with consolidated assets greater than $50 billion but less than $100 billion;
- FBOs with global assets in excess of $50 billion that operate a bank, branch, agency, representative office or other subsidiary in the US; and
- A depository institution with assets exceeding $50 billion.
Initial and Annual Reporting
The regulations establish the date on which a required living will must be initially submitted, as follows:
- July 1, 2012—(a) Bank holding companies with non-bank assets exceeding $250 billion; (b) any depository institution subsidiary of that holding company with assets greater than $50 billion; and (c) FBOs with US non-bank assets exceeding $250 billion.
- July 1, 2013—(a) Bank holding companies with more than $100 billion of non-bank assets but less than $250 billion of non-bank assets; (b) any depository institution subsidiary of that holding company with more than $50 billion of assets; and (c) FBOs with more than $100 billion of non-bank US assets but less than $250 billion of non-bank US assets.
- December 2013—(a) Bank holding companies with more than $50 billion in consolidated assets but less than $100 billion in non-bank assets; (b) any depository institution subsidiary of that holding company with $50 billion or more of assets; and (c) any FBO with global assets in excess of $50 billion but less than $100 billion of non-bank US assets.
Content of Holding Company and FBO Living Wills
Depending upon the size and complexity of a holding company, the living will must include the following sections—focusing on the resolution of the entity and its non-bank assets under the Bankruptcy Code:
- Executive Summary
- Strategic Analysis
- Corporate Governance Relating to Resolution Planning
- Organizational Structure
- Management and Information Systems
- Interconnectiveness and Interdependencies
- Supervisory and Regulatory Information
- Contact Information
A covered FBO must provide the same or similar information, but may limit its information and analysis to its subsidiaries, branches and agencies (including critical operations and core businesses) domiciled in the US or conducted in whole or in part in the US. Further, an FBO must provide information on how its US-based resolution plan is related to its overall resolution plan as required by foreign regulatory authorities, including its home country regulator.
It should also be noted that the regulations provide some relief for holding companies and FBOs whose assets are primarily depository institutions and which comprise 85% or more of the holding company’s assets or the FBO’s US assets. In those instances, the regulations provide a slightly streamlined set of reporting criteria for responsive non-bank data (which is logical because the depository institution subsidiary would remain required to submit a living will if its assets exceed $50 billion).
Content of Depository Institution Living Wills
A depository institution with assets of $50 billion or more in assets (referred to in the regulation as a “covered insured depository institution” or “CIDI”), must submit a companion living will to the FDIC that contains the following components:
- Executive Summary
- Organizational Structure of Legal Entities, Core Businesses Lines and Branch System
- Critical Services
- Interconnectiveness to the Parent Company’s Organization
- Strategy to Separate the CIDI from the Parent Company’s Organization
- Strategy for the Sale or Disposition of the Deposit Franchise, Business Lines and Assets
- Analysis of the Least Costly Resolution Method
- Asset Valuation Sales
- Identification of Major Counterparties
- Off-Balance-Sheet Exposures
- Collateral Pledged
- Trading Activities, Derivatives and Hedging
- Unconsolidated Balance Sheet of the CIDI and Other Material Entity Financial Statements
- Payment, Clearing and Settlement Systems
- CIDI Capital Structure and Funding Sources
- Affiliate Transactions, Exposures and Concentrations
- Systemically Important Functions
- Cross-Border Elements
- Management Information Systems
- Intellectual Property
- Corporate Governance and CIDI Contacts
Observations and Recommendations
While this Alert is intended to provide a summary of the requirements of the two regulations, we offer several observations for covered entities subject to the rules.
First, the complexity of the analysis both at the holding company and bank levels will be challenging. A review of the detail required at both levels indicates detailed mapping and disclosure of customer- and counterparty-level information, including exposure analyses and possible alternative resolution approaches of the aggregate corporate family.
To accomplish the drafting of one or several living wills, a detailed project plan is required, assembling legal, operational and risk management expertise. In that regard, the project team will require particular expertise to enable it to apply principles of bankruptcy law, as well as FDIC receivership law. This is because at both the holding company level and the depository level, federal bank receivership law might apply. Specifically, even though the regulations for holding company living wills appear to require that a holding company describe a recommended resolution plan at the holding company level under the Bankruptcy Code, for systemically important institutions Title II of the Dodd Frank Act permits the FDIC to supersede a bankruptcy filing at the holding company level and effectively create an FDIC receivership comprised of the entire holding company system. In a similar manner, the unique (and formidable) rules possessed by the FDIC for receiverships involving depository institutions must be clearly understood in order to adequately describe an effective resolution strategy for a depository institution that is subject to the requirement that it submit a living will, including a calculation of a least-cost resolution for the FDIC’s Deposit Insurance Fund.
Second, we note that the FDIC and the FRB recognize, and, in fact, encourage an iterative process for the development of responsive living wills, which is a regulatory dialogue that we believe should be initiated at the earliest opportunity. In order to avoid a living will being rejected by the FDIC or the FRB, we believe that regulatory consultation should commence immediately to determine the scope and detail necessary to produce acceptable documents and content.
Third, we note that the probable detail required by the rules creates serious concerns both in regard to business confidentiality and legal risk. In respect of business confidentiality, for example, it is likely that highly proprietary business strategies and competitive data must be provided to the FDIC and the FRB, including customers, counterparties, sources of business and overall strategic initiatives. From a legal risk perspective, it should be noted that, despite assurances to the contrary, the regulatory privilege for information in possession of the banking agencies is not absolute, which could result in data and systems of records being accessible to third parties through litigation and/or discovery requests directed at the submitting entity, the FDIC or the FRB.
In that regard, we note that there is a very useful provision that was included in the FDI Act several years ago that safeguards existing legal privileges when data is provided to the federal banking agencies. While beyond the scope of this discussion, we suggest that a compliance plan might incorporate such a strategy to further protect the confidentiality of resolution information submitted to the FDIC and the FRB.
We trust that this Alert is useful in identifying legal and compliance concerns when developing a project plan and team to address the living wills regulations. Of course, as a summary, this discussion does not include a discussion of many specialized concerns of covered entities, including holding companies, depository institutions and FBOs.