2016 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

ACTIVITIES RELATED TO SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS

The FDIC is committed to addressing the unique challenges associated with the supervision, insurance with respect to the related insured depository institutions, and potential resolution of large and complex financial institutions. The FDIC’s ability to analyze and respond to risks in these institutions is particularly important, as they comprise a significant share of banking industry assets and deposits. The FDIC’s programs provide for a consistent approach to large and complex bank supervision nationwide, allow for the identification and analysis of industry-wide and institution-specific risks and emerging issues, and enable a quick response to these risks. The FDIC has segregated these activities in two groups to both ensure that supervisory attention is risk-focused and tailored to the risks presented by the nation’s largest banks and meet the FDIC’s responsibilities under the FDI Act and the Dodd-Frank Act.

Complex Financial Institutions Program

The Dodd-Frank Act expanded the FDIC’s responsibilities pertaining to systemically important financial institutions (SIFIs) and nonbank financial companies designated by the FSOC. The FDIC’s Complex Financial Institution (CFI) program within the Division of Risk Management Supervision (RMS) performs ongoing risk monitoring of SIFIs and FSOC-designated nonbank financial companies, provides backup supervision of the firms’ related insured depository institutions (IDIs), and evaluates the firms’ required resolution plans. The CFI program also performs certain analyses that support the FDIC’s role as an FSOC member.

Resolution Plans – Living Wills

Title I of the Dodd-Frank Act requires that certain large banking organizations and nonbank financial companies designated by the FSOC for supervision by the FRB periodically submit resolution plans to the FRB and the FDIC. Each Title I resolution plan, commonly known as a living will, must describe the company’s strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company.

Large Bank Holding Companies with Substantial Nonbank Assets

Companies subject to the rule are divided into three groups: companies with $250 billion or more in nonbank assets, companies with nonbank assets between $100 billion and $250 billion, and all other companies with total consolidated assets of $50 billion or more. Companies in the first and second group were required to submit their resolution plans by July 1, 2015. These firms included Bank of America Corporation, Bank of New York Mellon Corporation, JP Morgan Chase & Co., State Street Corporation, Wells Fargo & Company, Goldman Sachs Group, Inc., Morgan Stanley, and Citigroup, Inc.

In April 2016, the FDIC and FRB jointly announced determinations and provided firm-specific feedback on the resolution plans submitted in July 2015. The agencies also made public the Resolution Plan Assessment Framework, which explains the resolution plan requirement, provides further information on the determinations, and demonstrates the agencies’ processes for reviewing the plans. Additionally, the agencies released new guidance for the July 2017 submissions.

Regarding the July 2015 submissions, the FDIC and FRB jointly determined that each of the resolution plans of Bank of America Corporation, Bank of New York Mellon Corporation, JP Morgan Chase & Co., State Street Corporation, and Wells Fargo & Company was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Act. The agencies issued joint notices of deficiencies to these five firms detailing the deficiencies in their plans and the actions the firms must take to address them. Each firm was required remediate its deficiencies by October 1, 2016. Failure to remedy the deficiencies could subject the firms to more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the firms as provided in the statute.

The agencies jointly identified weaknesses in the 2015 resolution plans of Goldman Sachs Group, Inc. and Morgan Stanley that the firms must address, but did not make joint determinations regarding the plans and their deficiencies. The FDIC determined that the plan submitted by Goldman Sachs Group, Inc. was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and identified deficiencies. The FRB identified a deficiency in Morgan Stanley’s plan and found that the plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code.

Neither agency found that Citigroup, Inc.’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, although the agencies did identify shortcomings that the firm must address.

All of the banking organizations that received feedback in April provided updates to their plans in October 2016. The FDIC and the FRB determined in December that Bank of America Corporation, Bank of New York Mellon Corporation, JP Morgan Chase & Co., and State Street Corporation adequately remediated the deficiencies cited in their 2015 resolution plans.

The agencies jointly determined that Wells Fargo & Company did not adequately remedy two of the firm’s three deficiencies. In light of the nature of the deficiencies and the resolvability risks posed by the firm’s failure to remedy them, the agencies imposed restrictions on the growth of international and nonbank activities of Wells Fargo & Company and its subsidiaries. The firm is expected to file a revised submission addressing the remaining deficiencies by March 31, 2017. If, after reviewing the March submission, the agencies jointly determine that the deficiencies have not been adequately remedied, the agencies will limit the size of the firm’s nonbank and broker-dealer assets to levels in place on September 30, 2016. If Wells Fargo & Company has not adequately remedied the deficiencies within two years, the statute provides that the agencies, in consultation with the FSOC, may jointly require the firm to divest certain assets or operations to facilitate an orderly resolution of the firm in bankruptcy.

Four foreign banking organizations (FBOs) also filed resolution plans in July 2015. The FDIC and FRB are currently reviewing those plans.

Other Large Bank Holding Company Filers

In December 2015, the third group of filers represented by 122 firms with total consolidated assets of $50 billion or more submitted resolution plans to the agencies. Of these, 34 resolution plans were either full or tailored plans that were required to take into account guidance provided by the agencies. The FDIC and FRB are jointly developing letters with feedback to these firms and guidance for their next resolution plan submissions on December 31, 2017.

The remaining 88 resolution plans were streamlined plans that required the firms to focus on material changes to their 2014 resolution plans, actions taken to strengthen the effectiveness of those plans, and, where applicable, actions to ensure any subsidiary insured depository institution would be adequately protected from the risk arising from the activities of nonbank affiliates of the firm. In May 2016, the agencies notified 84 firms that they would be permitted to file streamlined resolution plans for year-ends 2016 through 2018.

In December 2016, the agencies received 86 resolution plans from new filers or filers of streamlined plans. These plans include four full or tailored plans and 82 streamlined plans.

Nonbank Firms

Nonbank financial firms designated as systemically important by FSOC also are required to submit resolution plans for review by the FDIC and FRB. During December 2015, three nonbank firms— American International Group, Inc. (AIG), General Electric Capital Corporation, Inc. (GECC), and Prudential, Inc.— submitted their resolution plans for review. On June 28, 2016, GECC’s systemically important financial institution designation was rescinded, and the joint review of its plan ceased. The agencies are expected to provide feedback on the remaining plans in early 2017.

In August 2016, the FDIC and FRB, in order to afford adequate time for the agencies to provide thorough feedback to the firms, and for the firms to develop responsive submissions, jointly in letters to AIG and Prudential, Inc., stated the agencies’ decision to extend their 2016 annual resolution plan submission date to December 31, 2017, and indicated that their 2016 resolution plan requirement would be satisfied by the submission of the 2017 resolution plan.

MetLife, which was designated as systemically important on December 18, 2014, challenged its designation in federal court and won a ruling on March 30, 2016, that rescinded its designation. The Department of Justice on behalf of the FSOC has appealed that decision. The U.S. Court of Appeals heard oral arguments in October 2016. MetLife will not be required to submit a resolution plan unless its designation is reinstated.

Extended Deadline for Submissions for Certain Organizations’ Plans

In April 2016, the FDIC and FRB jointly announced determinations and provided firm-specific feedback on the 2015 resolution plans of eight systemically important, domestic banking institutions. The deadline for the next full plan submission for all eight domestic SIFIs is extended to July 1, 2017.

In July 2016, the FDIC and FRB jointly granted one- year filing extensions to four FBOs. These FBOs will be required to submit their next resolution plans on July 1, 2017.

In August 2016, the FDIC and FRB jointly granted one-year filing extensions to 36 domestic bank holding companies and foreign banking organizations, as well as two nonbank financial companies designated by the FSOC. These firms will be required to submit their next resolution plans on December 31, 2017.

Insured Depository Institution Resolution Plans

Part 360.10 of the FDIC Rules and Regulations requires an IDI with total assets of $50 billion or more to periodically submit to the FDIC a plan for its resolution in the event of its failure (IDI Rule). The IDI Rule requires each IDI meeting the criteria to submit a resolution plan that should allow the FDIC, as receiver, to resolve the IDI under Sections 11 and 13 of the Federal Deposit Insurance Act (FDI Act) in an orderly manner that enables prompt access to insured deposits, maximizes the return from the sale or disposition of the failed IDI’s assets, and minimizes losses realized by creditors. The resolution plan must also describe how a selected strategy will be least costly to the Deposit Insurance Fund.

In September 2015, the FDIC received 10 IDI resolution plans and in December 2015, an additional 26 resolution plans. The FDIC’s review of these plans focused on the insolvency scenario, strategy and funding, readiness, corporate governance, and the guidance that the FDIC issued in December 2014 for resolution plans required by the IDI Rule. Under the guidance, a covered IDI must provide a fully developed discussion and analysis of a range of realistic resolution strategies. To assist IDIs in writing their plans, the guidance includes direction regarding the elements that should be discussed in a fully developed resolution strategy and the cost analysis, clarification regarding assumptions made in the plan, and a list of significant obstacles to an orderly and least costly resolution that IDIs should address. The guidance applies to the resolution plans of the IDIs covered by the IDI Rule, as well as any new IDI meeting the threshold, commencing with the 2015 resolution plan submissions.

In August 2016, the FDIC extended the deadline for 10 IDI resolution plans from September 1, 2016 to October 1, 2017, and extended the deadline for 26 IDI resolution plans from December 31, 2016 to December 31, 2017. The FDIC is developing letters to these firms with feedback on their plans and guidance for their next resolution plan submissions.

In December 2016, the FDIC received two IDI plans from banks that are new filers.

Orderly Liquidation Authority – Resolution Strategy Development

Under the Dodd-Frank Act, failed or failing financial companies are expected to file for reorganization or liquidation under the U.S. Bankruptcy Code, just as any failed or failing nonfinancial company would file. If resolution under the Bankruptcy Code would result in serious adverse effects to U.S. financial stability, the Orderly Liquidation Authority (OLA) set out in Title II of the Dodd-Frank Act provides a backup authority to the bankruptcy process. There are strict parameters on its use, however, and it can only be invoked under a statutorily prescribed recommendation and determination process, coupled with an expedited judicial review process.

The FDIC has been developing resolution strategies to carry out its orderly liquidation authorities. Firm-specific resolution strategies are under development and are informed by the Title I plan submissions. In addition, preliminary work has begun to develop resolution strategies for the nonbank resolution plan filers and financial market utilities, particularly central counterparties (CCPs).

In September 2016, the FDIC conducted a second operational exercise to validate the steps involved in carrying out a Title II resolution. The first operational exercise conducted in December of 2015, focused on the initial appointment of the FDIC as receiver of a SIFI and the stabilization phase immediately following appointment. This year’s exercise covered the operation of the bridge financial company and the wind down and liquidation of the firm. Both operational exercises validated the systemic resolution framework and identified areas for further work.

Monitoring and Measuring Systemic Risks

The FDIC monitors risks related to SIFIs both at the firm level and industry wide, to inform supervisory planning and response, policy and guidance considerations, and resolution planning efforts. As part of this monitoring, the FDIC analyzes each company’s risk profile, governance and risk management capabilities, structure and interdependencies, business operation and activities, management information system capabilities, and recovery and resolution capabilities.

The FDIC continues to work closely with other Federal regulators to analyze institution-specific and industry-wide conditions and trends, emerging risks and outliers, risk management, and the potential risk posed to financial stability by SIFIs and nonbank financial companies. To support risk monitoring that informs supervisory and resolution planning efforts, the FDIC has developed systems and reports that make extensive use of structured and unstructured data. SIFI monitoring reports are prepared on a routine and ad-hoc basis and cover a variety of aspects that include risk components, business lines and activity, market trends, and product analysis.

Additionally, the FDIC has implemented and continues to expand upon various monitoring systems, including the Systemic Monitoring System (SMS). The SMS provides an individual risk profile and assessment for each SIFI by evaluating the level and change in metrics that serve as important barometers of overall risk. The SMS supports the identification of emerging risks within individual firms and the prioritization of supervisory and monitoring activities. The SMS also serves as an early warning system of financial vulnerability by gauging a firm’s proximity and speed to resolution event. Information from FDIC-prepared reports and systems are used to prioritize activities relating to SIFIs and to coordinate and communicate with the FRB and OCC.

The FDIC also has conducted semi-annual “Day of Risk” meetings to present, discuss, and prioritize the review of emerging risks. For each major risk, executive management discussed the nature of the risk, exposures of SIFIs, and planned supervisory efforts.

Backup Supervision Activities for IDIs of Systemically Important Financial Institutions

Risk monitoring is enhanced by the FDIC’s backup supervision activities. In its backup supervisory role, as outlined in Sections 8 and 10 of the FDI Act, the FDIC has expanded resources and developed and implemented policies and procedures to guide backup supervisory activities. These activities include performing analyses of industry conditions and trends, insurance pricing support, participating in supervisory activities with other regulatory agencies, and exercising examination and enforcement authorities when necessary. At institutions for which the FDIC is not the primary federal regulator, staff works closely with other regulatory authorities to identify emerging risk and assess the overall risk profile of large and complex institutions. The FDIC, OCC, and FRB operate under a Memorandum of Understanding that establishes guidelines for coordination and cooperation to carry out their respective responsibilities, including the FDIC’s role as insurer. Under this agreement, the FDIC has assigned dedicated staff to IDI subsidiaries of systemically important financial institutions to enhance risk-identification capabilities and facilitate the communication of supervisory information. These individuals work with the staff of the FRB and OCC in monitoring risk at their assigned institutions. In 2016, staff from the FDIC’s Division of Risk Management Supervision participated in 102 targeted examination activities with the FRB and 53 targeted examination activities with the OCC. The reviews included, but were not limited to, engagement in Comprehensive Capital Analysis and Reviews, Dodd-Frank Act Stress Testing, quantitative model reviews, swaps margin model reviews, credit risk-related reviews, and the Shared National Credit Reviews.

Cross-Border Efforts

Advance planning and cross-border coordination for the resolution of Global-SIFIs (G-SIFIs) is essential to minimizing disruptions to global financial markets. Recognizing that the resolution of a G-SIFI creates complex international legal and operational concerns, the FDIC continues to work with foreign regulators to establish frameworks for effective cross-border cooperation.

In October 2016, the FDIC hosted the second in an ongoing series of planned exercises to enhance coordination on cross-border resolution. The exercise was the culmination of planning since late 2015 and built on ongoing work by the international authorities in the area of cross-border resolution, including a staff-level exercise conducted earlier in July 2016. The exercise also coincided with the annual international meetings in Washington, DC, sponsored by the World Bank and International Monetary Fund. Participants in the exercise included senior financial officials representing authorities in the United States, United Kingdom, and Europe, including the U.S. Department of Treasury, FRB, OCC, SEC, CFTC, Federal Reserve Bank of New York, HM Treasury, Bank of England (BOE), U.K. Prudential Regulation Authority, the Single Resolution Board, European Commission, and European Central Bank.

The FDIC serves as a co-chair for all of the cross-border crisis management groups (CMGs) of supervisors and resolution authorities for the United States. In addition, the FDIC participates as a host authority in CMGs for foreign G-SIFIs. The FDIC and the European Commission continued their engagement through the joint Working Group, which is composed of senior executives at the FDIC and European Commission who meet to focus on both resolution and deposit insurance issues. In 2016, the Working Group discussed cross-border bank resolution and resolution of CCPs, among other topics. FDIC staff also participated in the Joint EU-US Financial Regulatory Forum (formerly the Financial Markets Regulatory Dialogue) with representatives of the European Commission and other participating European Union authorities, including the Single Resolution Board and the European Banking Authority, and staffs of the Treasury Department, FRB, SEC, CFTC, and other participating U.S. agencies.

The FDIC continued to advance its working relationships with other jurisdictions that regulate G-SIFIs, including those in Switzerland, Japan, and Germany. In 2016, the FDIC had significant staff-level engagements with these countries to discuss cross-border issues and potential impediments that could affect the resolution of a G-SIFI.

Systemic Resolution Advisory Committee

The FDIC created the Systemic Resolution Advisory Committee (SRAC) in 2011 to receive advice and recommendations on a broad range of issues regarding the resolution of systemically important financial companies pursuant to the Dodd-Frank Act. Over the years, the SRAC has provided important advice to the FDIC regarding systemic resolutions and advised the FDIC on a variety of issues, including the following:

• the effects on financial stability and economic conditions resulting from the failure of a SIFI;
• the ways in which specific resolution strategies would affect stakeholders and their customers;
• the tools available to the FDIC to wind down the operations of a failed organization; and
• the tools needed to assist in cross-border relations with foreign regulators and governments when a systemically important company has international operations.

Members of the SRAC have a wide range of experience, including managing complex firms, administering bankruptcies, and working in the legal system, accounting field, and academia. The SRAC met on April 14, 2016, and worked through an agenda that addressed the status of Title I Living Wills, an update on Title II Orderly Liquidation Authority, and developments in the European Union. The SRAC heard from Dr. Elke König, the first Chair of the European Union’s Single Resolution Board, on developments within the EU and efforts to collaborate with the United States. and other jurisdictions.

Financial Stability Oversight Council

The FSOC was created by the Dodd-Frank Act in July 2010 to promote the financial stability of the United States. It is composed of 10 voting members, including the Chairperson of the FDIC, and five non-voting members.

The FSOC’s responsibilities include the following:

• identifying risks to financial stability, responding to emerging threats in the financial system, and promoting market discipline;
• identifying and assessing threats that institutions may pose to financial stability and, if appropriate, designating a nonbank financial company to be supervised by the FRB and subject to heightened prudential standards;
• designating financial market utilities and payment, clearing, or settlement activities that are, or are likely to become, systemically important;
• facilitating regulatory coordination and information-sharing regarding policy development, rulemaking, supervisory information, and reporting requirements;
• monitoring domestic and international financial regulatory proposals and advising Congress and making recommendations to enhance the integrity, efficiency, competitiveness, and stability of U.S. financial markets; and
• producing annual reports describing, among other things, the Council’s activities and potential emerging threats to financial stability.

In 2016, the FSOC issued its sixth annual report. Generally, at each of its meetings, the FSOC discusses various risk issues. In 2016, the FSOC meetings addressed, among other topics, U.S. fiscal issues, interest-rate risk, credit risk, the FRB and European bank stress tests, the United Kingdom’s vote to leave the European Union (i.e., Brexit), cybersecurity, nonbank financial company designations, and housing reform.