Activities Related to Systemically Important Financial Institutions
The FDIC is committed to addressing the unique challenges associated with the supervision, insurance, and potential resolution of large and complex financial institutions. The agency’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. We have developed a consistent approach to large bank supervision nationwide that allows us to identify, analyze, and quickly respond to industry-wide and institution-specific risks and emerging issues. The FDIC has segregated these activities in two groups to both ensure that supervisory attention is risk-focused and tailored to the risk presented by the nation’s largest banks, and to meet our 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 systematically important financial institutions (SIFIs) and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC). The FDIC’s Complex Financial Institutions (CFI) Group and Large Bank Supervision Branch, both within RMS, perform ongoing risk monitoring of Global Systemically Important Banks (G-SIBs), large Foreign Banking Organizations (FBOs), and FSOC-designated nonbank financial companies; provide backup supervision of the firms’ related IDIs; and evaluate the firms’ required resolution plans. The CFI Group also performs certain analyses that support the FDIC’s role as an FSOC member.
Resolution Plans – Title I Living Wills
Certain large banking organizations and nonbank financial companies designated by the FSOC for supervision by the FRB are periodically required to submit resolution plans to the FRB and the FDIC. Each 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.
Companies subject to Title I are divided into three groups: 1) companies with $250 billion or more in nonbank assets, 2) companies with nonbank assets between $100 billion and $250 billion, and 3) all other companies with total consolidated assets of $50 billion or more.1 Large bank holding companies with substantial nonbank assets file in July. Other large bank holding companies file in December.
Large Bank Holding Companies with Substantial Nonbank Assets
July filers include Bank of America Corporation, Bank of New York Mellon Corporation, JPMorgan Chase & Co., State Street Corporation, Wells Fargo & Company, Goldman Sachs Group, Inc., Morgan Stanley, and Citigroup, Inc. (collectively referred to as the eight domestic G-SIBs); and Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, and UBS AG, (collectively referred to as the four large FBOs).
The four FBOs submitted resolution plans on or before July 1, 2018. On December 18, 2018, the FDIC and FRB issued letters to the four firms providing their review findings and information about areas where additional work needs to be done to improve resolvability. The agencies also extended the next resolution plan filing deadline for FBOs from July 1, 2019, to July 1, 2020. The extensions will allow additional time for the agencies to provide feedback to the firms on their last submissions and for the firms to produce their next plans.
On July 29, 2018, the agencies issued for public comment revised resolution plan guidance for the eight domestic banking organizations. The proposed guidance updates to the agencies’ expectations for how a firm’s resolution strategy should address derivatives and trading activities, and payment, clearing, and settlement activities. The comment period closed on September 14, 2018. The agencies issued final guidance on December 18, 2018.
Other Large Bank Holding Company Filers
In January 2018, the FDIC, jointly with the FRB, provided feedback to 19 foreign-based banking organizations with total consolidated assets of $50 billion or more regarding resolution plans submitted in December 2015. In March 2018, the FDIC and FRB provided feedback to two regional bank holding companies which submitted their resolution plans in December 2016. In May 2018, the FDIC and FRB granted an extension to 14 regional bank holding companies, extending the due date for their next resolution plan from December 2018 to December 2019.
Nonbank financial firms designated as systemically important by FSOC also are required to submit resolution plans for review by the FDIC and FRB. Prudential, Inc., the only remaining designated nonbank at the start of 2018, was required to submit its plan on December 31, 2018, pursuant to a previous extension. However, on October 16, 2018, FSOC rescinded Prudential’s designation as a SIFI.
Insured Depository Institution Resolution Plans
Section 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 (the “IDI rule”). The IDI rule requires covered IDIs to submit a resolution plan that would allow the FDIC, as receiver, to resolve the institution under Sections 11 and 13 of the 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 proposed strategy will be least costly to the Deposit Insurance Fund.
Forty-one large insured banks covered by the IDI rule submitted their resolution plans by July 1, 2018. In the time period leading up to the submission deadline, the FDIC had undertaken measures to improve transparency and responsiveness. Specifically, the FDIC established a dedicated mailbox to receive questions and responded to more than 200 individual questions from banks, conducted three industry calls, met with one trade association, and conducted numerous meetings with individual covered IDIs. The resolution plans submitted by the IDIs have been reviewed and potential impediments to resolvability identified. Letters will be sent to the firms in early 2019.
The FDIC expects to issue an advance notice of proposed rulemaking relating to the IDI rule for public comment during the first quarter of 2019.
Monitoring and Measuring Systemic Risks
The FDIC monitors risks related to G-SIBs and large FBOs at both 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 the other federal banking agencies 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 G-SIBs and large FBOs and non-bank 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. 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 G-SIB and large FBO by evaluating the level and change in metrics that serve as important indicators of overall risk. The SMS supports the identification of emerging and outsized risks within individual firms and the prioritization of supervisory and monitoring activities. The SMS also serves as an early warning system of financial vulnerability. Information from SMS and other FDIC-prepared reports are used to prioritize activities relating to SIFIs and to coordinate supervisory and resolution-related activities with the other banking agencies.
The FDIC also conducts semi-annual “Day of Risk” meetings to present, discuss, and prioritize the review of emerging risks. In some cases, these discussions can lead to shifts in supervisory focus or priorities. In 2018, RMS CFI Group implemented a new SIFI Risk Report that identifies key vulnerabilities of systemically important firms, gauges the proximity of these firms to a resolution event, and independently assesses the appropriateness of supervisory CAMELS ratings for the insured deposit institutions held by these firms.
Back-up Supervision Activities for IDIs of Systemically Important Financial Institutions
Risk monitoring is enhanced by the FDIC’s back-up supervision activities. In its back-up supervisory role, as outlined in Sections 8 and 10 of the FDI Act, the FDIC has expanded resources and has developed and implemented policies and procedures to guide back-up supervisory activities. These activities include performing analyses of industry conditions and trends, supporting insurance pricing, participating in supervisory activities with other regulatory agencies, and exercising examination and enforcement authorities when necessary.
At institutions where the FDIC is not the primary federal regulator, FDIC staff works closely with other regulatory authorities to identify emerging risk and assess the overall risk profile of large and complex institutions. The FDIC has assigned dedicated staff to IDIs of G-SIBs and large FBOs and certain other large IDIs 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.
Through December 2018, FDIC staff participated in 112 targeted examination activities with the FRB or OCC in G-SIBS, large FBOs, and large regional banks. The reviews included, but were not limited to, engagement in evaluation of risk management, corporate governance, BSA/AML reviews, credit risk reviews, quantitative model reviews, and cybersecurity risk and operational risk reviews. FDIC staff also participated in various interagency horizontal review activities, including the FRB’s Comprehensive Capital Assessment and Review, reviews of model risk management, and independent pricing of fair-valued assets.
Title II Orderly Liquidation Authority
Under the Dodd-Frank Act, failed or failing financial companies are expected to file for reorganization or liquidation under the U.S. Bankruptcy Code, similar to what 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, Title II of the Dodd-Frank Act provides a backup authority for resolving a company for which the bankruptcy process is not viable. There are strict parameters on the use of the Title II Orderly Liquidation Authority, however, and it can only be invoked under a statutorily prescribed recommendation and determination process, coupled with an expedited judicial review process.
Resolution Strategy Development
The FDIC has undertaken institution-specific strategic planning to carry out its orderly liquidation authorities with respect to the largest G-SIBs operating in the United States. The strategic plans and optionality being developed for these firms are informed by the Title I plan submissions. Further, the FDIC continues to build its systemic resolution framework, portions of which have been shared with other authorities, and is developing process documents to facilitate the implementation of the framework in a Title II resolution. In addition, preliminary work continues in the development of resolution strategies for financial market utilities, particularly central counterparties (CCPs).
Advance planning and cross-border coordination for the resolution of Global Systemically Important Financial Institutions (G-SIFIs) is essential to minimizing disruptions to global financial markets. Recognizing that the resolution of a G-SIFI creates complex cross-border legal and operational concerns, the FDIC continues to work with foreign regulators to establish frameworks for effective cooperation, including information-sharing arrangements.
The FDIC continued to advance its working relationships with authorities from other jurisdictions that supervise G-SIFIs, and through international forums, such as the Financial Stability Board’s Resolution Steering Group and its various subgroups. In 2018, the FDIC continued its ongoing work with international authorities to enhance coordination on cross-border bank resolution. This work included participation by senior financial officials and staff from the United States and key foreign jurisdictions. FDIC staff continues to pursue follow-on work endorsed by senior officials from participating agencies.
The FDIC serves as a co-chair for all of the cross-border crisis management groups (CMGs) of supervisors and resolution authorities for U.S. G-SIFIs. In addition, the FDIC participates as a host authority in CMGs for foreign G-SIFIs. The FDIC and the European Commission (EC) continued their engagement through a joint working group, which is composed of senior executives at the FDIC and EC who meet to focus on both resolution and deposit insurance issues. In 2018, the working group discussed cross-border bank resolution and resolution of CCPs, among other topics.
FDIC staff also participated in the joint U.S.-EU Financial Regulatory Forum meetings, one held in Washington, D.C., in January 2018, and another held in Brussels in June 2018, with representatives of the EC and other participating European Union authorities, and staffs of the Department of Treasury, FRB, SEC, Commodities Futures Trading Commission (CFTC), and other participating U.S. agencies. Discussions addressed the outlook for financial regulatory reforms and future priorities, including those involving standards relevant to banks, and cooperation on cross-border issues relevant to capital markets such as those involving CCPs.
In 2018, FDIC staff also participated in the inaugural meeting of the U.S.-UK Financial Regulatory Working Group in London, which was formed to support financial stability and related matters. This cooperation is especially important given transition in the UK’s regulatory relationships as it withdraws from the European Union.
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 advised the FDIC on a variety of issues, including:
- 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 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 SIFI 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 last meeting of the SRAC was held on December 6, 2018. Agenda topics included updates to the Title I Living Wills, Title II Orderly Liquidation Authority, and international developments.
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 for supervision by the FRB 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 December 2018, the FSOC recently issued its 2018 annual report. Generally, at each of its meetings, the FSOC discusses various risk issues. In 2018, the FSOC meetings addressed, among other topics: the process for considering applications from bank holding companies or their successors under section 117 of the Dodd-Frank Act, the annual reevaluation of its designation of a nonbank financial company, financial market volatility, fluctuations in various asset classes (including cryptocurrency futures) and the impacts on financial institutions and markets, the progress of the United Kingdom’s efforts to leave the European Union (i.e., “Brexit”) and potential changes that could affect U.S. financial markets or institutions, and alternative reference rates, including the adoption of the Secured Overnight Financing Rate. Additionally, in early 2018, the Council established a working group to study digital asset and distributed ledger technology. The working group brings together federal financial regulators whose jurisdictions are relevant to the oversight of digital assets and their underlying technologies.
1In 2018, the EGRRCPA increased the threshold for resolution plan requiremenrs under Section 165(d) of the Dodd-Frank Act. The FDIC and FRB have announced their intention to propose amendments to current regulations and tailor certain future plan submission requirements in 2019.