2017 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, 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 related to complex financial institutions provide for a consistent approach to large 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 risk 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 SIFIs and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC). The FDIC’s CFI Group and Large Bank Supervision Branch, both within RMS, perform ongoing risk monitoring of SIFIs and FSOC-designated nonbank financial companies, provide back-up 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 – 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.
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 generally required to submit their resolution plans by July 1, 2015. These firms included 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 banking organizations); and Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, and UBS AG, (collectively referred to as the four large foreign banking organizations, or FBOs).
In April 2016, the FDIC and FRB jointly announced determinations and provided firm-specific feedback on the resolution plans submitted by the eight domestic banking organizations in July 2015. After reviewing 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, JPMorgan 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. The agencies also made public the Resolution Plan Assessment Framework, which explains the resolution plan requirement, provides further information on the determinations, and outlines the agencies’ processes for reviewing the plans. Additionally, the agencies released new guidance for the July 2017 submissions.
All of the domestic banking organizations that received feedback in April 2016 provided updates to their plans in October 2016. The FDIC and the FRB determined in December 2016 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. In April 2017, the agencies jointly determined that Wells Fargo & Company had remedied the remaining two deficiencies.
The eight domestic banking organizations submitted updated plans on or before July 1, 2017. On December 19, 2017, the FDIC and the FRB issued letters to the eight firms providing the findings of their review of those plans and information about areas where additional work needs to be done to improve resolvability. The agencies also jointly determined that the plans of four firms have “shortcomings,” which are less-severe weaknesses that require additional work in their next plan.
Guidance for the FBOs was also issued in March 2017, and a workshop to review the guidance was held with FDIC staff on May 2, 2017. The FBO guidance was issued to help the FBOs improve their resolution plans and to reflect the significant restructuring that they have undertaken to form intermediate holding companies. The guidance is organized around a number of key vulnerabilities, such as capital, liquidity, and governance mechanisms. FAQs on the FBO guidance were issued in September 2017.
Other Large Bank Holding Company Filers
In March 2017, the FDIC and FRB jointly announced that the agencies had provided firm-specific feedback on the resolution plans submitted by 16 regional bank holding companies with total consolidated assets of $50 billion or more regarding resolution plans submitted in December 2015. In December 2016, an additional 86 firms subject to the rule submitted resolution plans to the agencies. These plans included four full or tailored plans and 82 reduced content plans, which focus on material changes since their previous 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 August 2017, the FDIC and FRB jointly announced that the two tailored plan filers in 2016 would be eligible to submit reduced content plans as their next submission. The FDIC and the FRB are jointly developing feedback to two domestic filers regarding their 2016 plan and to several FBOs regarding their 2015 plans. In August and September 2017, the FDIC and the FRB extended the due dates for these companies’ next plans to December 31, 2018.
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. (PRU) — submitted their resolution plans for review. On June 28, 2016, FSOC rescinded GECC’s designation as a systemically important financial institution and joint agency review of GECC’s plan ceased.
In August 2016, the FDIC and FRB jointly extended the next annual resolution plan submission date to December 31, 2017, for AIG and PRU. To allow the agencies an opportunity to consider potentially providing guidance and to provide the firms with sufficient time to develop responsive plans in July 2017, the agencies extended the next resolution plan due date to December 31, 2018, and informed the firms that this plan would satisfy their 2016 and 2017 annual resolution plan submission requirements. Subsequently, on September 29, 2017, as part of the annual review of AIG’s designation as systemically important, FSOC rescinded that designation.
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. In August 2017 the U.S. Court of Appeals ordered the appeal held in abeyance indefinitely. MetLife will not be required to submit a resolution plan unless its designation is reinstated.
Extended Deadline for Submissions for Certain Organizations’ Plans
In March 2017, the agencies provided a one-year filing extension to the four large FBOs; their next resolution plans are now due on July 1, 2018.
In September 2017, the agencies extended the next resolution plan filing deadline for the eight large domestic banks by one year to July 1, 2019. The extension will provide the time needed for firms to remediate any weaknesses identified in their July 2017 submissions and to prepare and improve their next resolution plan submissions. The agencies are also extending by one year, to December 31, 2018, the next resolution plan submission deadline for 82 foreign banks with limited U.S. operations.
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 (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 proposed strategy will be least costly to the DIF.
By September 1, 2015, the FDIC received 10 IDI resolution plans, from IDIs whose parent companies are among the group of largest SIFIs under the IDI Rule, and by December 31, 2015, 26 resolution plans were received from other IDIs with smaller parent companies.
By December 31, 2016, the FDIC received initial IDI resolution plans from two additional insured banks. The FDIC reviewed these resolution plans in a manner consistent with the IDI Rule and guidance issued by the FDIC in December 2014. In June 2017, the FDIC provided feedback letters to each covered IDI, addressing findings and establishing expectations for the next IDI resolution plan to better align the content of resolution plans with the FDIC’s actual resolution experience. The FDIC also extended the due date for the next IDI resolution plan for each of these 38 insured banks to July 1, 2018.
Since the feedback letters were issued, the FDIC has established processes to improve transparency and responsiveness. The FDIC established a dedicated mailbox to receive questions, conducted two industry calls, met with one trade association, and conducted 35 meetings with individual covered IDIs.
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 for resolving a company for which the bankruptcy process is not viable. 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 undertaken institution-specific strategic planning to carry out its orderly liquidation authorities with respect to the largest global systemically important banks (G-SIBs) and FBOs. The strategic plans and optionality being developed for these firms are informed by the Title I plan submissions. Further, the FDIC continues to build upon the 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 the nonbank resolution plan filers and financial market utilities, particularly central counterparties (CCPs).
Monitoring and Measuring Systemic Risks
The FDIC monitors risks related to SIFIs 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 SIFIs 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. 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 indicators 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. In 2017, RMS CFI began piloting a new SIFI Risk Report (SRR) 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 ratings for the insured deposit institutions held by these firms. Implementation of this new report is targeted for early 2018.
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 SIFIs 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 2017, FDIC staff participated in 43 targeted examination activities with the FRB and 46 targeted examination activities with the OCC. The reviews included, but were not limited to, engagement in evaluation of risk governance, BSA/AML reviews, quantitative model reviews, and credit risk-related reviews. FDIC staff also participated in various interagency horizontal review activities, including the FRB’s Comprehensive Capital Assessment and Review, and reviews of compliance and conduct risk, model risk management, and sales practices.
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, including information-sharing arrangements.
In October 2016, the FDIC hosted the second in an ongoing series of planned exercises with international authorities to enhance coordination on cross-border bank resolution. 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, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Reserve Bank of New York, HM Treasury, Bank of England, U.K. Prudential Regulation Authority, the Single Resolution Board (SRB), European Commission (EC), and European Central Bank. Staffs since have pursued a follow-on work plan endorsed by senior officials from these 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 continued their engagement through the 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 2017, 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 with representatives of the EC 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 authorities from other jurisdictions that regulate G-SIFIs, including those in Switzerland and Japan, and through international forums, such as the Financial Stability Board’s (FSB) Resolution Steering Group. In 2017, the FDIC had significant staff-level engagements with these authorities 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 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 April 14, 2016. The SRAC discussed among other topics, the status of Title I Living Wills, an update on Title II Orderly Liquidation Authority, and developments in the European Union. In 2017, the charter of the SRAC was renewed. The next meeting is anticipated to be held in 2018.
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.
The FSOC recently issued its 2017 annual report. Generally, at each of its meetings, the FSOC discusses various risk issues. In 2017, 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 2016 vote to leave the European Union (i.e., Brexit), cybersecurity, nonbank financial company designations, and housing reform.