FDIC Proposes Toughening CIDI Resolution Plan Rules
The Situation: The Federal Deposit Insurance Corporation ("FDIC") has proposed significant amendments (the "Proposal") to its rule requiring covered insured depository institutions ("CIDIs") to prepare and file resolution plans.
The Result: The Proposal would restate the existing resolution planning rule for CIDIs, effectively eliminating the current moratorium on resolution plan filings for banks with $50 billion to $100 billion in assets, and significantly expanding the existing informational content requirements for all CIDIs.
Looking Ahead: The Proposal would also require CIDIs with $100 billion or more in assets to use a bridge bank as their default resolution strategy for purposes of their plans. The public comment period for the Proposal will end on November 30, 2023.
The FDIC recently proposed to amend and restate its regulation on resolution planning. Resolution plans are a mix of information collection exercise and resolution strategy that the FDIC has required certain banks to produce since 2012 to facilitate—in theory—the FDIC's readiness to resolve them in the event of their insolvency. (These resolution plans are similar, but not identical, to the separate resolution plans that the Dodd-Frank Act requires of large bank holding companies.) The FDIC cites the recent failures of Silicon Valley Bank, First Republic Bank, and Signature Bank as important factors necessitating and informing the Proposal.
The current rule applies to insured depository institutions with assets of $50 billion or more. But the Proposal would create two classes of banks for purposes of resolution submission requirements: group A banks, with $100 billion or more in assets, and group B banks, with at least $50 billion but less than $100 billion in assets. The primary difference between group A and B banks is that the former will continue to have to include a comprehensive strategy that would allow for the bank's orderly and efficient resolution as well as associated information related to the scenario in which the bank fails and valuation capabilities necessary to support the FDIC's statutory least cost analysis. In contrast, group B banks need not include a resolution strategy in their rebranded "informational filings." As detailed in the Appendix, the Proposal significantly expands on information content items that both group A and B banks will need to collect and produce to the FDIC.
Both group A and B banks would need to make resolution submissions every two years, although the FDIC reserves the right to alter submission timeframes. This differs from the current rule's nominal annual filing requirement, which the FDIC had often waived given its inability to provide timely feedback to banks and, more recently, indefinitely extended to a triennial filing requirement in a 2021 FDIC policy statement. The Proposal also would require an "interim supplement" one year after a bank's most recent resolution submission that would update some, but not all, of the required information in a full filing. The first submissions under the amended rule would be due no earlier than 270 days after the effective date of the final rule. However, the FDIC states that "certain CIDIs [will] submit resolution plans pursuant to the current rule … as previously directed unless they receive written notice of an extension."
Other notable aspects of the Proposal include:
- Resolution Strategy: The FDIC mandates that group A banks adopt a default resolution strategy involving the creation of a bridge bank, with the bridge bank ultimately sold to one or more acquirers, or any other exit strategy following stabilization of its operations. Here, the Proposal is drawing from the FDIC's recent experience with its resolution of Silicon Valley Bank and Signature Bank, in which it relied upon a bridge bank to give the FDIC additional time to find buyers. Alternative strategies, such as an over-the-weekend sale, are theoretically still possible, but may face an uphill battle in light of the FDIC's preference for a bridge depository institution ("BDI") strategy.
- Failure Scenario: The FDIC specifies that the bank's failure scenario must take place against a backdrop of depleted or pledged high-quality liquid assets, unexpected outflows of deposits, increased liquidity requirements from counterparties, and depleted capital (even if the immediate failure is liquidity-related in nature). The FDIC may also provide "additional or alternative parameters" for the failure scenario that a group A bank must consider, although it will "endeavor" to provide 12 months' notice to an affected bank.
- Filing Cohorts: Group A banks' submissions would be divided into two staggered cohorts, with each cohort filing every other year for "improved workflow and efficiency." Given the horizontal (i.e., comparative) nature of past resolution planning feedback, however, staggered cohorts may introduce additional uncertainty into banks' planning efforts and FDIC standards for assessment.
- Credibility Standard: Under the current rule, a resolution plan is credible if its strategies and information underlying them are well-founded and based on observable information and employ reasonable projections. Under the Proposal, a resolution submission would not be credible if it fails to meet the foregoing standard or if its "identified strategy would not provide timely access to insured deposits, maximize value from the sale or disposition of assets, minimize any losses realized by creditors of the CIDI in resolution, and address potential risk of adverse effects on U.S. economic conditions or financial stability."
- Franchise Components: The Proposal introduces the concept of "franchise components," which will join the existing rule's "material entities" and "core business lines" as a building block of the resolution submission. The Proposal defines "franchise components" as a "business segment, regional branch network, major asset or asset pool, or other key component of a CIDI's franchise that can be separated and sold or divested."
- Engagement and Capabilities Testing: The Proposal requiresCIDIs to: (i) provide the FDIC with access to information and personnel that the FDIC deems relevant ("engagement"); and (ii) demonstrate their capability to provide any information, data, or analysis underlying the resolution submission ("capabilities testing"). The Proposal highlights the importance of engagement for group B banks in particular, noting it will "provide the FDIC with an avenue to establish ongoing dialogue with institutions regarding the informational filing's content, including how the information may be considered when vetting potential resolution strategies."
- Enforcement: The Proposal explicitly states that a CIDI's failure to resubmit a resolution submission to meet FDIC standards or to comply with engagement and capabilities testing may result in the FDIC taking enforcement action. "The FDIC is proposing this provision in order to emphasize that the FDIC expects each CIDI to fully participate in every engagement and capabilities testing exercise and to inform CIDIs of potential consequences for failure to comply with these requirements." Unlike the current rule, the Proposal asserts that "[v]iolating any provision of this section constitutes a violation of a regulation and may subject the CIDI to enforcement actions under Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), including paragraph (t) thereunder." 12 U.S.C. 1818 establishes the Federal banking agencies' enforcement powers generally (e.g., cease and desist orders, prohibitions, civil money penalties, etc.) and paragraph (t) refers to the FDIC's "backup" enforcement power with respect to banks for which it is not the primary Federal regulator (i.e., national banks and state member banks).
Issues With the Proposal
The Proposal suffers from a number of potential problems, including problems identified by the two FDIC board members who voted against it. First, the Proposal may exceed the FDIC's statutory authority. FDIC Director Jonathan McKernan highlights two areas in which the Proposal may go beyond any statutory mandate: (i) requiring a bank to demonstrate resolution capabilities, rather than merely to provide information; and (ii) constraining the choice of resolution strategies.
Second, the Proposal may create additional burdens for banks without countervailing benefits as a matter of policy, as noted by FDIC Vice Chairman Travis Hill. Among other things, it intensifies resolution plan requirements, compresses the current de facto submission calendar from three years to two, and generally pushes responsibility onto the banks for resolution planning that is better suited to the FDIC, including, as an example, providing plans for the exit from a bridge bank through sale to an acquirer or acquirers.
Appendix: Resolution Submission Content Note: This Appendix compares the requirements of the current rule and the Proposal with respect to information content of resolution submissions. It does not cover resolution planning guidance.
Three Key Takeaways
- The FDIC is increasing its leverage over banks' day-to-day activities in the name of resolution readiness.
- Consistent with the impact of other recent regulatory initiatives from the Federal banking agencies, regional banks in particular will bear a disproportionate burden.
- The Proposal's creation of a filing group with reduced requirements may provide little, if any, actual benefit to eligible banks compared to their treatment under the current rule.
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