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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

2014 Annual Report

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I. Management’s Discussion and Analysis

The Year in Review


Complex Financial Institutions

The FDIC is committed to addressing the unique challenges associated with the supervision, insurance, and potential resolution of large and complex insured 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. The FDIC’s programs related to complex financial institutions provide for a consistent approach to large bank supervision nationwide, allows for the analysis of financial institution risks on an individual and comparative basis, and enables a quick response to risks identified at large institutions. Given the concentration of risk in these institutions, the FDIC has expanded its activities at the nation’s largest and most complex institutions through additional and enhanced on-site and off-site monitoring and supervision.

Risk Monitoring Activities for Systemically Important Financial Institutions

The Dodd-Frank Act expanded the FDIC’s responsibilities for overseeing and monitoring the largest, most complex BHCs and large, nonbank systemically important financial institutions (SIFIs) designated by the Financial Stability Oversight Council (FSOC) for supervision by the FRB. In 2014, the FDIC’s CFI activities included ongoing risk monitoring of the largest, most complex banking organizations and backup supervision of their IDIs, as well as ongoing risk monitoring of certain nonbank financial companies. The FDIC continues to work closely with other federal regulators to better understand the risk measurement and management practices of SIFIs and assess the potential risks they pose to financial stability.

The FDIC undertakes risk monitoring activities at the company level to understand each company’s: structure, business activities, and resolution/recovery capabilities to inform the FDIC’s resolution planning staff; business activities and risk profile to gauge both proximity to a resolution event and the speed at which a company’s condition could potentially deteriorate to a resolution event; recovery plans; early warning signals and triggers; and the range of remedial actions to be taken should a triggering event occur.

In 2014, the FDIC’s off-site monitoring systems for SIFIs were expanded to enhance efforts to analyze structured and unstructured data. The FDIC developed and implemented the Systemic Monitoring System (SMS), which is an off-site monitoring tool for SIFIs that will be used to enhance risk scoping of various activities. This tool will be integrated into the FDIC’s SIFI on-site monitoring and resolution planning processes. The SMS synthesizes large amounts of quantitative data from numerous sources (i.e., data that pertain to both proximity-to-default and speed-to-default), evaluates the level and change in metrics that serve as important barometers of overall risk, produces a preliminary risk assessment and comprehensive risk profile report for individual SIFIs, and identifies areas requiring further follow-up to determine the need for additional supervisory activities or accelerated resolution planning efforts. SMS risk assessments will help the FDIC to identify emerging risks in individual firms, prioritize supervisory activities, and inform the development of appropriate supervisory responses and resolution strategies in deteriorating situations. However, the SMS is not a predictive or a statistically based model; rather it is a dynamic tool that assists the FDIC in identifying risk in the largest firms.

Risk monitoring is enhanced by the FDIC’s backup supervision activities. 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, exercising examination authorities, and exercising enforcement authorities when necessary. At institutions where the FDIC is not the PFR, staff works closely with other financial institution regulatory authorities to identify emerging risk and assess the overall risk profile of large and complex institutions. The FDIC, the FRB, and the OCC operate under a Memorandum of Understanding (MOU) that establishes guidelines for coordination and cooperation to carry out their respective responsibilities, including the FDIC’s role as insurer and supervisor. Under this agreement, the FDIC has assigned dedicated staff to systemically important and large, complex regional banking organizations to enhance risk identification capabilities and facilitate the communication of supervisory information. These individuals work closely with PFR staff in the ongoing monitoring of risk at their assigned institutions.

Additionally, the FDIC allocates examination and analytical resources annually to the FRB’s Comprehensive Capital Analysis and Review and Comprehensive Liquidity Analysis and Review programs. Also, in 2014, the FDIC expanded participation with the FRB’s Supervisory Assessment of Recovery and Resolution Preparedness program in an effort to assess firms’ capabilities related to resolvability planning and preparedness.

Title I Resolution Plans

Title I of the Dodd-Frank Act requires that each BHC with total consolidated assets of $50 billion or more and each nonbank financial company that the FSOC determines 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 U.S. Bankruptcy Code in the event of the company’s material financial distress or failure. The FDIC and the FRB issued a joint rule, effective November 30, 2011, to implement the requirements for resolution plans filed under Section 165(d) [the 165(d) Rule].

The 165(d) Rule 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. 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:

In July 2012, 11 First Wave Companies submitted initial 165(d) plans. 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 submissions2. The agencies also 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.

In August 2014, the agencies announced the completion of reviews of the October 2013 resolution plans submitted by the First Wave Companies. Based on the review of the 2013 plans, the FDIC Board determined that the plans were not credible and did not facilitate an orderly resolution under the U.S. Bankruptcy Code as required by Section 165(d) of the Dodd-Frank Act. Although this determination was not made jointly by the FDIC and the FRB, the agencies jointly identified and communicated to the firms, certain firm-specific shortcomings with the 2013 resolution plans and agreed that the First Wave Companies must take immediate action to improve their resolvability and reflect those improvements in their 2015 plans. The agencies further agreed that in the event that the First Wave Companies have not, on or before July 1, 2015, submitted plans responsive to the identified shortcomings, the agencies expect to use their authority under Section 165(d) to determine that a resolution plan does not meet the requirements of the Dodd-Frank Act.

In August 2014, the agencies issued joint feedback letters to each of the First Wave Companies. The letters noted some improvements from the original plans submitted by the companies, but detailed specific shortcomings of each firm’s plan and the agencies expectations for the 2015 submission.

While the shortcomings of the plans varied across the First Wave Companies, the agencies identified several common features of the plans’ shortcomings. These common features included: (1) assumptions that the agencies regard as unrealistic or inadequately supported, such as assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators; and (2) the failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution.

The agencies will require that the annual plans submitted by these firms in 2015 demonstrate that the firms are making significant progress to address all the shortcomings identified in the letters and are taking actions to improve their resolvability under the U.S. Bankruptcy Code.

In July 2014, the First Wave Companies and two of the Second Wave Companies submitted revised resolution plans, and the three nonbank financial companies designated by the FSOC (referred to as Fourth Wave Companies) submitted their initial resolution plans. The FRB and the FDIC granted requests for extensions to two Second Wave Companies, which submitted their plans to the agencies by October 1, 2014. The FDIC and the FRB are reviewing the plans submitted by the various companies in July and October 2014, with the exception of one plan for which the review has been completed. In November 2014, the FDIC and the FRB announced the completion of their review of this firm’s 2014 resolution plan and issued a joint letter to the firm. The agencies noted improvements from the original plan submitted in 2013. The guidance given to the firm for preparation of its 2015 plan submission stated that its 2014 plan provided a basis for a resolution strategy that could facilitate an orderly liquidation under bankruptcy. If fully developed in the future, the firm’s plan could reduce the risk that the company’s failure would pose to the stability of the U.S. financial system. The agencies also jointly identified specific shortcomings of the 2014 resolution plan that need to be addressed in the 2015 plan. The letter detailed the specific shortcomings and the expectations of the agencies for the 2015 submission.

By December 31, 2013, 116 Third Wave Companies had submitted initial resolution plans. In August 2014, after reviewing the plans, the agencies provided each of the Third Wave Companies the following guidance for their second round submissions based on the relative size and scope of each firm’s U.S. operations:

Insured Depository Institution Resolution Plans

The FDIC has a separate rule that requires all IDIs with assets greater than $50 billion to submit resolution plans to the FDIC (IDI Rule). The IDI Rule requires each covered institution to provide a resolution plan that should allow the FDIC as receiver to resolve the institution in an orderly manner that enables prompt access of insured deposits, maximizes the return from the failed institution’s assets, and minimizes losses realized by creditors and the DIF. These plans complement those required under the 165(d) Rule.

Based upon its review of IDI plans submitted prior to and during 2014, the FDIC issued guidance in December 2014 for resolution plans required by the IDI Rule. Under the guidance, a covered institution must provide a fully developed discussion and analysis of a range of realistic resolution strategies. To assist institutions 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 institutions should address. The guidance applies to the resolution plans of 36 institutions covered by the IDI Rule, as well as any new institution meeting the threshold, commencing with the 2015 resolution plan submissions.

Title II 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. If resolution under the Bankruptcy Code would result in serious adverse effects to the U.S. financial stability, the Orderly Liquidation Authority (OLA) set out in Title II of the Dodd-Frank Act provides a back-up 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.

Prior to the 2008 financial crisis, the FDIC’s receivership role was limited to IDIs. No regulator had the authority to resolve a failing financial company, (e.g., a BHC) or any of the company’s non-IDI affiliates or any other nonbank financial company through the FDIC’s receivership process, in order to avoid the systemic consequences that could arise from bankruptcy or other insolvency regime filing. 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 without cost to 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 strategies including one approach, referred to as “Single Point of Entry (SPOE)”, to carry out its orderly liquidation authorities. In December 2013, the FDIC published a notice in the Federal Register that provides greater detail on the SPOE strategy and discusses the key issues that the FDIC could encounter in the resolution of a SIFI3. The notice requested public comment and views as to whether the SPOE approach can be effective in supporting the policy objectives of minimizing moral hazard and promoting market discipline while maintaining the stability of the U.S. financial system as set forth in Title II of the Dodd-Frank Act. In 2014, the FDIC reviewed all submitted comments. Firm-specific resolution strategies continue to be developed and refined.

As part of the FDIC’s efforts to develop and refine strategies that could be implemented in a Title II resolution, the FDIC and the Bank of England, in conjunction with the financial institution regulators in the respective jurisdictions, have been developing contingency plans for the failure of a U.S.- or U.K.-based SIFI that has significant operations in the United Kingdom or the United States, respectively. Of the 28 global SIFIs (G-SIFIs) identified by the Financial Stability Board (FSB) of the Group of 20 (G-20) countries, four are headquartered in the United Kingdom and eight are headquartered in the United States. Moreover, more than 80 percent of the reported foreign activities of the eight U.S. G-SIFIs emanates from the United Kingdom. In October 2014, the FDIC was host to the Secretary of the Treasury, the Chair of the Federal Reserve Board of Governors, the Chancellor of the Exchequer, and the Governor of the Bank of England, as well as leading financial regulatory bodies in the United States and United Kingdom for an exercise designed to further promote a working relationship between U.S. and U.K. authorities in the event of the failure and resolution of a G-SIFI. The exercise’s high-level discussion furthered understanding among U.S. and U.K. principals regarding resolution strategies for G-SIFIs under the two countries’ resolution regimes.

Cross-Border Efforts

Advance planning and cross-border coordination for the resolution of G-SIFIs will be essential to minimizing disruptions to global financial markets. Recognizing that G-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.

During 2014, the FDIC continued to coordinate with representatives from European authorities to discuss issues of mutual interest, including the resolution of European G-SIFIs and harmonization of receivership actions. The FDIC and the European Commission (E.C.) established a joint Working Group composed of FDIC and E.C. senior executives to focus on both resolution and deposit insurance issues. The Working Group meets twice a year with other interim interchanges, including the exchanging of staff members. Discussions were held concerning the FDIC’s experience with bank resolutions, systemic resolution strategies, the European Union (E.U.)-wide Credit Institution and Investment Firm Recovery and Resolution Directive, the E.C.’s amendment to harmonize deposit guarantee schemes across the E.U., and the E.C.’s Single Resolution Mechanism. In June 2014, the FDIC conducted a training seminar on resolutions for resolution authorities and E.C. staff.

The FDIC continues to foster its relationships with other jurisdictions that regulate G-SIFIs, including Switzerland, Germany, France, and Japan. In 2014, 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 G-SIFI. This work will continue in 2015 with plans to host tabletop exercises with regulatory staff from these jurisdictions.

Systemic Resolution Advisory Committee

In 2011, the FDIC Board approved the creation of the Systemic Resolution Advisory Committee (SRAC). The SRAC provides important advice to the FDIC regarding systemic resolutions, and advises the FDIC on a variety of issues including the following:

Picture of Paul Volcker, former Federal Reserve ChairmanSRAC member and former Chairman of the Federal Reserve Board of Governors Paul Volcker (left) and FDIC Chairman Gruenberg discussing resolution strategy.

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. A meeting of the SRAC was held in December 2014. The SRAC discussed, among other topics, living wills and bankruptcy, resolution plan transparency, international developments, ISDA protocol, and orderly liquidation updates.


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:

In 2014, the FSOC issued its fourth annual report. Generally, at each of its meetings, the FSOC discusses various risk issues. In 2014, the FSOC meetings addressed, among other topics, U.S. fiscal issues, market environment and developments in the Ukraine, an asset management industry conference hosted by the FSOC, short-term wholesale funding markets, money market mutual fund reforms, and nonbank financial company designations.


3 Notice entitled, "Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy," 78 Fed. Reg. 76614 (Dec. 18, 2013).

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