2013 Annual Report
Activities Related to Systemically Important Financial Institutions
Risk Monitoring Activities for Systemically Important Financial Institutions
Paul Volcker, former Federal Reserve Chairman, offers his perspective on Title I resolution planning at a Systemic Resolution Advisory Committee meeting.
The Dodd-Frank Act expanded the FDIC’s responsibilities for overseeing and monitoring the largest, most complex bank holding companies and large, nonbank systemically important financial institutions (SIFIs) designated by the Financial Stability Oversight Council (FSOC) for supervision by the Board of Governors of the Federal Reserve System (FRB). In 2013, the FDIC’s complex financial institution program activities included ongoing reviews of all banking organizations with more than $100 billion in assets as well as certain nonbank financial companies. Given the scope of the FDIC’s responsibilities under the Dodd-Frank Act, the FDIC developed additional risk assessment tools, processes, and procedures to better identify major risks at SIFIs, to ensure corrective actions when warranted, and to efficiently allocate resources. Additionally, the complex financial institution program prepares the FDIC to resolve insured depository institutions (IDIs) in the event of failure, including the review of IDI-prepared resolution plans.
In the FDIC’s back-up supervisory role, as outlined in Sections 8 and 10 of the FDI Act and Sections 23A and 23B of the Federal Reserve Act, the FDIC has expanded resources and developed and implemented policies and procedures to guide back-up supervisory activities. These activities include participating in supervisory activities with other regulatory agencies, performing analyses of industry conditions and trends, and exercising examination and enforcement authorities, when necessary.
In addition, the FDIC continues to work closely with other federal regulators to gain a better understanding of the risk measurement and management practices of SIFIs, and assess the potential risks they pose to financial stability.
Title I Resolution Plans
Title I of the Dodd-Frank Act requires that each bank holding company with total consolidated assets of $50 billion or more, and each nonbank financial company that the FSOC determined should be subject to supervision by the FRB, prepare a resolution plan, or “living will,” and periodically provide the plan to the FRB and the FDIC. Section 165(d) of the Dodd-Frank Act requires the company’s resolution plan to provide for its rapid and orderly resolution under the bankruptcy code in the event of the company’s material financial distress or failure. The FDIC and the FRB issued a joint rule to implement the requirements for resolution plans to be filed pursuant to Section 165(d) [the 165(d) Rule].
In addition to the 165(d) Rule, the FDIC issued a separate rule that requires all IDIs with greater than $50 billion in assets to submit resolution plans to the FDIC (IDI Rule). The IDI’s resolution plan should enable the FDIC, as receiver, to resolve the IDI using the FDIC’s traditional resolution powers under the Federal Deposit Insurance Act (FDI Act), in a manner that ensures that depositors receive access to their insured deposits generally within one business day of the IDI’s failure, maximizes the net present value return from the disposition of its assets, and minimizes the amount of any loss realized by creditors.
The 165(d) Rule was effective as of November 30, 2011, and provides for staggered initial submission dates for the resolution plans of covered companies. Thereafter, unless otherwise agreed to by the FDIC and the FRB, each covered company must submit a plan annually, on or before the anniversary of its initial submission date. Initial submission dates for IDI resolution plans under the IDI Rule, which was effective April 1, 2012, conform to those for covered companies under the 165(d) Rule. Under the 165(d) Rule, the initial submission date is based upon nonbank assets (or for a foreign-based covered company, U.S. nonbank assets) as of November 30, 2011, and is set by the rule as follows:
- July 1, 2012: “First Wave Companies” are covered companies with $250 billion or more in nonbank assets (or U.S. nonbank assets for foreign-based covered companies).
- July 1, 2013: “Second Wave Companies” are covered companies with $100 billion or more in nonbank assets (or U.S. nonbank assets for foreign-based covered companies).
- December 31, 2013: “Third Wave Companies” are all other covered companies which are covered companies with less than $100 billion in nonbank assets (or U.S. nonbank assets for foreign-based covered companies).
Any company that becomes subject to the 165(d) Rule after its effective date (including nonbank financial companies designated by the FSOC), and any IDI that becomes subject to the IDI Rule after its effective date, must submit its initial resolution plan by the next July 1 that is at least 270 days after the date it became subject to the respective rule (or following its designation by FSOC).
Eleven First Wave Companies submitted initial 165(d) plans in July 2012. Based upon review of the initial resolution plans, the FDIC and the FRB developed guidance for the First Wave Companies to permit alternate resolution strategies and to clarify information that should be included in their 2013 resolution plan submissions. This guidance is posted on the FDIC’s public Website 1. In the guidance, the FDIC and the FRB identified an initial set of significant obstacles to achieving a rapid and orderly resolution that each of the First Wave companies should address in its plan, including the actions or steps the company has taken or proposes to take to remediate or otherwise mitigate each obstacle (with a timeline for any proposed actions). The agencies extended the second submission filing date to October 1, 2013, giving the First Wave Companies additional time to develop resolution plans complying with the guidance. Each of the First Wave Companies submitted its second submission plan by the October 1 deadline, and the agencies are currently reviewing the plans.
Four Second Wave Companies submitted initial resolution plans by the July 1, 2013, submission date. The FDIC and the FRB reviewed those plans. One hundred and sixteen Third Wave Companies and twenty-two Third Wave IDIs submitted initial resolution plans by December 31, 2013. The FDIC and the FRB are currently reviewing those plans. Three nonbank SIFIs designated by the FSOC for FRB supervision are expected to submit initial resolution plans in 2014.
Title II Resolution Strategy Development
The preferred approach for the resolution of a large, complex financial company is for the firm to file for reorganization or liquidation under the U.S. Bankruptcy Code, just as any failed nonfinancial company would. In certain circumstances, however, resolution under the bankruptcy code may result in serious adverse effects on financial stability in the United States. In such cases, the Orderly Liquidation Authority (OLA) set out in Title II of the Dodd-Frank Act serves as a potential alternative that could be invoked pursuant to a statutorily prescribed recommendation and determination process, coupled with an expedited judicial review process.
Prior to the recent crisis, the FDIC’s receivership authority focused on IDIs. No regulator had the authority to place the bank holding company (BHC) or affiliates of an IDI or any other nonbank financial company into an FDIC receivership to avoid systemic consequences. The OLA addresses those limitations and gives the FDIC the back-up powers necessary to potentially resolve a failing BHC or other SIFI in an orderly manner that imposes accountability on shareholders, creditors, and management of the failed company while mitigating systemic risk and imposing no cost on taxpayers.
The FDIC has largely completed the core rulemakings necessary to carry out its responsibilities under Title II of the Dodd-Frank Act. Additionally, the FDIC has been developing a strategic approach, referred to as the “Single Point of Entry (SPOE)”, to carry out those orderly liquidation authorities. During 2013, the FDIC reviewed the characteristics of each domestic company and studied previous financial downturns to determine the systemic effects and channels of contagion, and consulted with external practitioners and experts on key resolution components and options. The FDIC discussed the SPOE concept at outreach events with other domestic government agencies, the Systemic Resolution Advisory Committee, industry groups, the academic community, and international financial regulators. In December 2013, the FDIC approved publication of a notice in the Federal Register that provides greater detail on the SPOE strategy and discusses the key issues that will be faced in the resolution of a SIFI.2 Comments are expected in early 2014, and the FDIC will consider those comments as resolution strategies continue to be developed.
Advance planning and cross-border coordination for the resolution of globally active SIFIs will be essential to minimizing disruptions to global financial markets. Recognizing that global SIFIs create complex international legal and operational concerns, the FDIC continues to reach out to foreign regulators to establish frameworks for effective cross-border cooperation.
As part of the bilateral efforts, the FDIC and the Bank of England, in conjunction with the prudential regulators in our respective jurisdictions, have been developing contingency plans for the failure of a global SIFI that has operations in the U.S. and the U.K. Of the 28 G-SIFIs designated by the Financial Stability Board (FSB) of the G-20 countries, four are headquartered in the U.K., and another eight are headquartered in the U.S. Moreover, approximately 70 percent of the reported foreign activities of the eight U.S. G-SIFIs emanates from the U.K. The FDIC and U.K. authorities released a joint paper on resolution strategies in December 2012, reflecting the close working relationship between the two authorities. This joint paper focuses on the application of “top-down” resolution strategies for a U.S. or a U.K. financial group in a cross-border context and addresses several common considerations to these resolution strategies. In December 2013, the FDIC and the Bank of England, including the Prudential Regulation Authority, in conjunction with the Federal Reserve Board and the Federal Reserve Bank of New York, held a staff-level tabletop exercise exploring cross-border issues and potential mitigating actions that could be taken by regulators in the event of a resolution.
The FDIC also is coordinating with representatives from European authorities to discuss issues of mutual interest, including the resolution of European global SIFIs and ways in which we can harmonize receivership actions. The FDIC and the European Commission (E.C.) have established a joint Working Group composed of senior executives from the FDIC and the E.C. to focus on both resolution and deposit insurance issues. The agreement establishing the Working Group provides for meetings twice a year with other interim interchanges and the exchange of detailees. In 2013, the Working Group convened formally twice, and there has been ongoing collaboration at the staff level, including discussions of the FDIC’s experience with resolutions, the SPOE strategy, the E.C.’s proposed European Union (E.U.)-wide Credit Institution and Investment Firm Recovery and Resolution Directive, the E.C.’s proposed amendment to harmonize further deposit guarantee schemes E.U.-wide, and the E.C.’s proposal for a Single Resolution Mechanism that would apply to Euro-area Member States, as well as any others that would opt-in. The FDIC and the E.C. also have exchanged staff members for short periods to enhance staff experience with respective resolution authorities. In 2014, at the request of the E.C., the FDIC is planning to conduct a training seminar on resolutions for E.C. staff.
The FDIC continues to foster its relationships with other jurisdictions that regulate global SIFIs, including Switzerland, Germany, and Japan. In 2013, the FDIC had significant principal and staff-level engagements with these countries to discuss cross-border issues and potential impediments that would affect the resolution of a global SIFI. This work will continue in 2014 with plans to host tabletop exercises with staff from these authorities. The development of joint resolution strategy papers, similar to the one with the U.K., as well as possible exchanges of detailees, has also been discussed.
In a significant demonstration of cross-border cooperation on resolution issues, the FDIC signed a November 2013 joint letter with the Bank of England, the Swiss Financial Market Supervisory Authority, and the German Federal Financial Supervisory Authority, to the International Swaps and Derivatives Association, Inc. (ISDA). This letter encouraged ISDA to develop provisions in derivatives contracts that would provide for the short-term suspension of early termination rights and other remedies in the event of a G-SIFI resolution. The adoption of such changes would allow derivatives contracts to remain in effect throughout the resolution process following the implementation of a number of potential resolution strategies. International coordination and outreach and efforts to address impediments to an orderly resolution of a global SIFI are expected to continue.
Systemic Resolution Advisory Committee
In 2011, the FDIC Board approved the creation of the Systemic Resolution Advisory Committee. The Committee provides important advice to the FDIC regarding systemic resolutions. The Committee advises 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 their customers.
- The tools available to the FDIC to wind down the operations of a failed organization.
- The tools needed to assist in cross-border relations with foreign regulators and governments when a systemic company has international operations.
Members of the Committee have a wide range of experience including managing complex firms; administering bankruptcies; and working in the legal system, accounting field, and academia. A meeting of the Systemic Resolution Advisory Committee was held on December 11, 2013. The Committee discussed, among other topics, the bankruptcy process for large financial companies, the FDIC’s SPOE strategy, and international coordination in financial company resolutions.
Honored guest Paul Tucker from the Bank of England, seated to the right of Chairman Gruenberg, with several members of the Systemic Resolution Advisory Committee and FDIC Board: (seated, from left) William Donaldson, Vice Chairman Hoenig, Paul Volcker, Chairman Gruenberg, Paul Tucker, and Director Norton; (standing, from left) Simon Johnson, Michael Bradfield, Richard Herring, Anat Admati, John Koskinen, Donald Kohn, Douglas Peterson, and David Wright.
Coordinating Interagency Resolution Planning
In 2013, the FDIC continued to promote interagency information-sharing and cooperative resolution planning by holding quarterly meetings with the other federal regulatory agencies. The FDIC also conducted eight interagency outreach meetings with the financial market utilities (FMUs) that were designated by the FSOC.
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 ten 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 system, and promoting market discipline.
- Designating a nonbank financial company for supervision by the FRB subject to heightened prudential standards.
- Designating FMUs 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, competiveness, and stability of U.S. financial markets.
- Producing annual reports describing, among other things, the Council’s activities and potential emerging threats to financial stability.
During 2013, the FSOC designated three nonbank financial companies for FRB supervision, including enhanced prudential standards. Also during 2013, the FSOC issued its third annual report. Generally, at each of its meetings, the FSOC discusses various risk issues and, in 2013, the FSOC meetings addressed U.S. fiscal issues, an asset management study prepared by the Office of Financial Research, cyber security, market volatility, market and trading disruptions, money market mutual fund reforms, and fixed income valuations, among other topics.
2 Notice entitled, "Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy," 78 Federal Register 76614 (December 18, 2013).