As previewed by banking agencies for over a year and with increased frequency after the recent bank failures,[1] the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board (“FRB”) and the Office of the Comptroller of the Currency (together with the FDIC and FRB, the “Agencies”) on Tuesday issued three key proposals regarding minimum long-term debt requirements and resolution planning.
First, the Agencies released a notice of proposed rulemaking (“LTD NPR”) that would require certain large banks to issue and maintain a minimum amount of qualifying long-term debt (“LTD”) and that would subject covered entities to so-called “clean holding company” requirements.[2] Second, the FDIC released a proposal (“IDI NPR”) to comprehensively restate its resolution planning rule (the “IDI Rule”) applicable to insured depository institutions (“IDIs”).[3] Third, the FDIC and FRB jointly released proposed guidance regarding section 165(d) holding company resolution plan submissions for Category II and III domestic banking organizations (“Domestic Guidance Proposal”)[4] as well as for Category II and III foreign banking organizations (“FBO Guidance Proposal,” collectively, the “Guidance Proposals”).[5]
Public comments on each proposal are due November 30, 2023, which is the same day that comments are due on the Agencies’ Basel III endgame proposal and the FRB’s global systemically important banking organization (“GSIB”) surcharge proposal.[6] Collectively, the Basel III endgame proposal, GSIB surcharge proposal and this week’s proposals on LTD and resolution planning could result in banks with $100 billion or more in assets facing significant additional burdens in the coming years.
This week’s proposals on LTD and resolution planning represent the Agencies’ next steps in their ongoing efforts to enhance resolution-related requirements under the Biden administration and also indicate a continued trend of reversing some of the tailoring regulatory standards implemented during the Trump administration. Martin Gruenberg, now FDIC Chairman, presaged these developments when, in 2019, he spoke of the “challenges posed by the failure of a large regional bank” and lamented the weakening or removal during the Trump administration of many resolution requirements to which large banks were subject.[7] In April 2022, Acting Comptroller of the Currency Michael Hsu discussed potential regulatory responses to what he perceived to be a “resolvability gap” with respect to large regional banks.[8] Later that year, the FRB and FDIC jointly issued an advance notice of proposed rulemaking (“LTD ANPR”) related to LTD and other resolution-related requirements aimed at banking organizations with $250 billion or more in assets.[9]
The failures of Silicon Valley Bank, Signature Bank and First Republic Bank following the release of the LTD ANPR highlighted, from the Agencies’ perspective, the complexity of resolving banking organizations with $100 billion or more in total assets. In response, the Agencies have proposed to lower the total assets threshold for the application of the LTD requirement from $250 billion as suggested in the LTD ANPR to $100 billion in the new LTD NPR. The Agencies have similarly proposed to impose stricter capital requirements on banking organizations with $100 billion or more in assets. These proposals represent a marked shift away from the Agencies’ previous practice of tailoring the application of prudential standards based on a banking organization’s size, as required by the 2018 amendments to the Dodd-Frank Act.
As with the Basel III endgame proposal, FDIC directors and FRB governors were not unanimous in voting to issue the proposed rules and guidance. Though each member of the FDIC board of directors voted to issue the LTD NPR, the board’s Republican appointees, Vice Chairman Travis Hill and Director Jonathan McKernan, expressed certain reservations. FRB Governor Bowman voted against issuing the LTD NPR while Governor Waller voted to issue the LTD NPR while expressing concerns in a short statement. Vice Chairman Hill and Director McKernan also voted against issuing the IDI Rule. Finally, Vice Chairman Hill and Governor Bowman voted against issuing the Guidance Proposals.
Below, first we identify certain key observations and takeaways regarding the proposals. Next, we describe certain notable aspects of each proposal.
I. Key Observations and Takeaways
The impact of these proposals would be far-reaching, affecting not only large regional banks (which have been under scrutiny in the wake of this spring’s bank failures) but also U.S. GSIBs and certain foreign banking organizations (“FBOs”) as well. As noted above, an overarching trend that can be seen across these proposals is the continued move to reduce the meaningful tailoring among banking organizations of varying asset sizes. We highlight the scope of the proposals and some key initial takeaways specific to the each of the proposals below:
– Scope: The proposals, if enacted, would materially impact not only large regional banks, but also U.S. GSIBs, savings and loan holding companies (“SLHCs”), FBOs and banking organizations with between $50 billion and $100 billion in assets.
– In addition to applying new requirements to large regional banks, among others, the LTD NPR would also affect entities currently subject to the FRB’s total loss absorbing capacity (“TLAC”) rule, including by adding new disclosure requirements for U.S. GSIBs and subjecting IDI subsidiaries of IHCs of foreign GSIBs to new internal LTD requirements.
– The IDI NPR would enhance existing resolution planning requirements for IDIs with over $100 billion in assets and would create a completely new submission requirement for IDIs with between $50 billion and $100 billion in assets.
– The Domestic Guidance Proposal and FBO Guidance Proposal would describe expectations for section 165(d) holding company resolution plans submitted by domestic and foreign triennial full filers, respectively, thereby affecting Category II and III domestic banking organizations and FBOs.[10]
– LTD NPR:
– The LTD NPR would require certain large bank holding companies, SLHCs and IDIs to issue minimum eligible LTD calibrated in line with the current LTD requirement applicable to U.S. intermediate holding companies (“IHCs”) of foreign GSIBs. The LTD NPR, however, does not include a total TLAC requirement similar to those applicable to U.S. GSIBs and IHCs of foreign GSIBs.
– For most covered entities, the LTD NPR would require the holding company to issue eligible LTD externally and would not permit the external LTD to be issued by the bank (other than certain grandfathered legacy LTD). The subsidiary IDI would be required to issue internal LTD of equal amount.
– This new internal LTD requirement for IDIs would apply to IDI subsidiaries of FBOs as well. That is, the LTD NPR would add a new requirement for covered IDI subsidiaries of U.S. IHCs, including IDI subsidiaries of IHCs of foreign GSIBs, to issue internal LTD. The new internal LTD requirement for IDIs would not apply to the IDI subsidiaries of U.S. GSIBs.
– Certain legacy externally issued LTD would be grandfathered under the LTD NPR. As noted above, the proposal would permit legacy external LTD issued by IDIs to satisfy minimum requirements.
– IDI NPR:
– The IDI NPR would require an increased cadence of submissions (biennial), with an interim supplement on off-years, which may foreshadow future frequency changes to resolution plan submissions required under section 165(d) for holding company resolution plans.
– If adopted in the final rulemaking, the submission requirements would effectively impose an annual submission requirement on covered IDIs.
– The IDI NPR would require IDIs with at least $50 billion but less than $100 billion in total assets to submit certain “informational filings” which, while not as comprehensive as the “full” resolution plans that would be required of the larger covered IDIs, would still represent a significant submission.
– The IDI NPR would require covered IDI filers to augment certain information produced in their plans, and the proposal in general represents a significant change to the contents of IDI resolution plans.
– The IDI NPR would take effect in a relatively short period of time. Once a version of the IDI NPR is finalized, IDI submissions may need to be produced in less than a year (270 days) following the effective date of any such final rulemaking.
– Domestic and FBO Guidance Proposals:
– The Guidance Proposals largely follow the format of the previous guidance for U.S. GSIBs and certain FBOs, except that they explicitly and separately address both multiple-point-of-entry (“MPOE”) and single-point-of-entry (“SPOE”) strategies.
– The Domestic Guidance Proposal includes extensive guidance for SPOE strategies, despite no covered organizations having adopted an SPOE strategy.
– The FBO Guidance Proposal would adopt certain provisions from the proposed version of the 2020 FBO guidance, reintroducing some burdensome elements that were removed following the comment period for that release, and the FBO Guidance Proposal would also apply to the FBOs that are already subject to the 2020 guidance.
– The FDIC and FRB expect applicable filers to take the final guidance into account in their resolution plans “as soon as practicable,” and the next plans for triennial full filers are due July 1, 2024. The FDIC and FRB are contemplating whether to provide a short extension of the next resolution plan submission date, with the expectation that these plan submissions may nonetheless be due sooner than one year after the Guidance Proposals are published in final form.
II. LTD NPR
Following their October 2022 LTD ANPR, the Agencies are inviting public comment on the LTD NPR, which is intended to “improve financial stability by increasing the resolvability and resiliency”[11] of large banks.
– Scope of application. As described in more detail in the table below, the new LTD requirements would apply to Category II, III and IV bank holding companies (“BHCs”) and SLHCs along with Category II, III and IV IHCs of non-GSIB foreign banking organizations (together “Covered Entities”). In addition, the LTD NPR would apply to IDIs with $100 billion or more in assets (including the IDI subsidiaries of U.S. IHCs of foreign GSIBs), along with their affiliated IDIs, other than IDI subsidiaries of U.S. GSIBs (“Covered IDIs”). The LTD NPR, however, also makes certain revisions to the existing TLAC rule that would affect U.S. GSIBs and U.S. IHCs of foreign GSIBs.
We have created a comparative chart outlining the LTD requirements under the LTD NPR, available here.
– Impact. The Agencies estimate the LTD NPR would require Covered Entities to issue an aggregate principal amount of $250 billion in LTD (which is a total amount and does not take into account existing LTD).
– Calibration. A Covered Entity or Covered IDI would be required to hold LTD no less than the amount equal to the greater of: 6% of its risk-weighted assets, 3.5% of its average total consolidated assets and 2.5% of its total leverage exposure, if the entity is subject to the supplementary leverage ratio (“SLR”).[12]
– The Agencies indicate the calibration is based on the capital refill framework, which was also used to calibrate the LTD requirement for U.S. GSIBs. The objective is to ensure each Covered Entity has a minimum amount of eligible LTD such that if its going-concern capital is depleted, the eligible LTD would be sufficient to fully recapitalize the entity enough to meet minimum leverage capital and risk-based capital requirements plus the capital conservation buffer.
– The capital refill framework is premised on an SPOE resolution strategy, which is the strategy adopted by U.S. GSIBs. As discussed further below, however, most regional banking organizations use a MPOE resolution strategy.[13] As a result, FDIC Vice Chairman Hill and Director McKernan expressed doubts in their testimony and prepared statements as to whether LTD requirements for regional banking organizations should be calibrated based on the capital refill framework.
– Reservation of authority. The LTD NPR includes explicit reservations of authority, which would allow the Agencies to require Covered Entities and Covered IDIs to hold LTD greater or less than the otherwise required amount based on the risk posed by the Covered Entity.
– Although the Agencies have included similar reservations of authority in other regulations, the FRB did not include such language in the original TLAC rule.
– The inclusion in the LTD NPR may be another indication of the Agencies’ intention to increase prudential requirements based on supervisory findings or ratings downgrades, as previewed in the FRB’s report on Silicon Valley Bank’s failure.
– Eligible LTD. Similar to the current definition of eligible LTD for U.S. GSIBs, the LTD NPR would define eligible external LTD with respect to a Covered Entity as a debt security that:
– Is paid in and issued by the Covered Entity;
– Is not: (i) secured; (ii) guaranteed by the Covered Entity or its subsidiaries; or (iii) subject to an arrangement that would enhance the instrument’s seniority;
– Has a maturity of greater than or equal to one year from the date of issuance;
– LTD that is due to be paid between one and two years would be subject to a 50% haircut for purposes of LTD requirements and a 100% haircut in its remaining year.
– Is governed by U.S. law or the laws of any State;
– Does not allow the holder to have a contractual right to accelerate payment of principal or interest, except in case of a receivership, insolvency, liquidation or similar proceeding of the Covered Entity or a payment failure that continues for 30 days or more (or a right exercisable on one or more specified dates, which would affect the instrument’s maturity);
– Does not have a credit-sensitive feature (such as an interest rate that is reset based on the Covered Entity’s credit quality);
– Is not a structured note (such as a debt instrument with an embedded derivative feature, including structured notes with principal protection);
– Cannot be converted or exchanged for equity in the Covered Entity; and
– Must be issued with a minimum principal denomination of $400,000 and must not be exchanged for smaller denominations by the Covered Entity.
– This requirement differs from the current definition in the TLAC rule. If the rule is finalized as proposed, new issuances of LTD by U.S. IHCs and U.S. GSIBs would be subject to this minimum denomination requirement.
– Additional features of certain eligible LTD.
– Internal LTD issued by a Covered IDI would be subject to the requirements above and would typically have to be issued to a company of which the IDI is a consolidated subsidiary. Further, internal LTD issued by a Covered IDI or by an IHC would not be subject to the minimum principal denomination requirement.
– Both internal and external LTD issued by a Covered IDI would be required to be contractually subordinated to claims of depositors and the IDI’s general unsecured creditors.
– Internal LTD issued by an IHC would be required to have a contractual conversion trigger allowing the FRB to convert the LTD into equity in the IHC if, among other conditions, the IHC is in default or in danger of default. In addition, internal LTD issued by an IHC would be permitted to have credit-sensitive features.
– Certain legacy externally issued LTD, including legacy external LTD issued by Covered IDIs that would be required to issue internal LTD, would be grandfathered as eligible LTD.
– Clean holding company requirements. The LTD NPR would impose so-called clean holding company requirements on Covered Entities similar to those currently imposed on U.S. GSIBs and IHCs of foreign GSIBs. Specifically, Covered Entities would generally be prohibited from, among other things, issuing short-term debt (maturity less than one year); entering into qualified financial contracts (“QFCs”) with third parties (with some exceptions); or issuing guarantees subject to cross-defaults. Covered Entities must also comply with a 5% cap on certain liabilities that are not eligible LTD.
– Transition. The LTD NPR would be phased in over three years. Specifically, Covered Entities and Covered IDIs must meet 25% of the LTD requirements one year after the rule is effective, 50% after the second year and 100% after the third year. Entities that become subject to LTD requirements in the future would similarly be subject to a three-year phase in. Certain requirements, however, may have a quicker phase-in. For example, an FBO with a Covered IHC would need to provide a certification regarding the planned resolution strategy six months after the effective date of the rule.
– Changes to GSIB TLAC rules. In addition to proposing LTD requirements for non-GSIB institutions, the LTD NPR would make certain changes to existing TLAC requirements for covered U.S. and foreign GSIBs.
– While the current TLAC rule requires a 50% haircut for LTD due within one and two years, the haircut does not currently apply for inclusion in the entity’s TLAC requirement. The LTD NPR would apply the 50% haircut to the TLAC requirement for U.S. GSIBs and IHCs of foreign GSIBs as well. The Agencies estimate this would result in a $65 billion decrease in aggregate TLAC across GSIBs.
– As discussed above, the LTD NPR would require new external LTD issued by U.S. GSIBs and IHCs of foreign GSIBs to be issued in minimum denomination of $400,000.
– As had been previously expected, the LTD NPR would clarify that underwriting agreements, fully paid structured share repurchase agreements and employee and director compensation agreements would not be considered QFCs for purposes of the clean holding company requirements. The LTD NPR would also give the FRB authority to decide to exempt other QFCs from the prohibition.
– U.S. GSIBs would be subject to increased LTD-related disclosure requirements.
– The LTD NPR also asks whether IDI subsidiaries of U.S. GSIBs should be subject to the proposal’s internal LTD requirements.
III. IDI NPR
In proposing the IDI NPR, the FDIC noted that the changes were driven, in large part, by the challenge the FDIC faced in resolving the three IDIs during the 2023 bank failures, including because “the FDIC lacked important resolution planning information to facilitate marketing” of these institutions.[14] However, there was not unanimous consent among the FDIC directors to issue the IDI NPR for public comment; the IDI NPR was passed by the majority of directors over the objections of Vice Chairman Hill and Director McKernan.
– Scope of application. The IDI NPR would continue to apply to all IDIs with at least $50 billion in total assets; however, those covered IDIs would now be divided into two distinct groups – “Group A” and “Group B” IDIs.
– “Group A” IDIs would consist of IDIs with $100 billion or more in total assets. As discussed further below, Group A IDIs would be required to file full resolution plans.
– “Group B” IDIs would consist of IDIs with at least $50 billion but less than $100 billion in total assets. As discussed further below, Group B IDIs would be required to file reduced resolution plans, called “informational filings,” by the IDI NPR.
– An IDI’s place in Group A or Group B would generally be determined based upon the average of the institution’s four most recent Reports of Condition and Income. However, if an IDI’s total assets increase as the result of a merger or similar transaction, the status of the IDI would be based upon its assets immediately on the date of the consummation of the merger or other transaction.
– The FDIC identified 31 IDIs that would currently fall into Group A and 14 IDIs that would currently fall into Group B.
– Timing of submissions. The IDI NPR would increase the frequency of resolution plan submissions, moving from the current three-year cycle to a new two-year cycle.
– In the new cycle, all covered IDIs would be required to submit either their resolution plan or their informational filing (depending on their group) every other year.
– Furthermore, in off years, IDIs would be required to submit an “interim supplement” composed of a subset of the content items required in their biennial submissions. The content of these interim supplements would be the same for Group A and Group B filers.
– The FDIC also anticipates frequent engagement and capabilities testing (described below) to occur with Group A and B IDIs over the course of the two-year cycle. While the FDIC does not expect to engage with any Group A IDI more than once in each two-year cycle, the FDIC does anticipate engagement with every Group B IDI in each cycle. In addition, the FDIC expects that capabilities testing for each Group A and Group B IDI will occur no more than once per two-year cycle.
– In his statement objecting to the IDI NPR, Vice Chairman Hill noted that this was an incredibly ambitious timeline for the FDIC, and that even when IDI resolution plans were submitted on a triennial cycle “[h]istorically, the FDIC has repeatedly struggled to provide firms meaningful, timely feedback on IDI resolution plans.”[15]
– Content changes for Group A IDIs. As noted above, Group A IDIs are currently required to submit resolution plans under the IDI Rule (albeit on a triennial cycle). The IDI NPR would make several notable changes to the content requirements for Group A resolution plan submissions.
– Resolution Strategy. The IDI NPR would not allow an IDI to use as its identified strategy a closing weekend sale of the bank to one or more acquirers. Instead, it would establish as the default identified strategy one that would provide for the establishment and stabilization of a bridge bank and an exit strategy from the bridge bank.
– Failure Scenario. The IDI NPR would add more detailed requirements for the resolution plan’s failure scenario, as it requires the identified strategy to be based on a failure scenario that demonstrates that the IDI is experiencing material financial distress, due, in part, to increased liquidity requirements from counterparties and deposit outflows.
– Least-Cost Test. The IDI NPR would remove the requirement to explain how the IDI’s proposed resolution strategy would be the least-cost to the Deposit Insurance Fund, replacing it with the requirement that an IDI demonstrate the capabilities necessary to produce valuations that the FDIC can use to conduct the statutorily required least-cost analysis at the time of an actual failure. Further to this, an IDI would be required to describe its valuation process in its submission and provide as an appendix a valuation analysis that includes a range of quantitative estimates of value.
– Content changes impacting both Groups A and B. In addition to the content changes impacting Group A resolution plan submissions, the IDI NPR would introduce changes to content included in both Group A resolution plan submissions and Group B informational filings.
– Capabilities. The IDI NPR would require IDIs to demonstrate that they have the capabilities necessary to ensure continuity of critical services and that franchise components are separable and marketable. To facilitate the marketing of franchise components, IDIs would be required to describe current capabilities and processes to provide access to or establish a virtual data room promptly in the run-up to or upon failure of the IDI.
– Deposit activities. The IDI NPR would require significantly enhanced disclosures regarding an IDI’s overall deposit activities, requiring information about the IDI’s deposit structure and key depositors.
– Interconnections. The IDI NPR would remove the requirement for resolution plans to describe “interconnections” between the IDI and the rest of the banking organization, replacing that requirement with beefed-up requirements to describe critical services provided by the parent company or a parent company affiliate and the separability of franchise components.
– Digital services and electronic platforms. The IDI NPR would require IDIs to include in their submissions information about digital services and electronic platforms that IDIs offer to depositors to support banking transactions for business customers.
– Content changes for Group B IDIs. As Group B IDIs do not currently have any filing obligations under the FDIC’s application of the IDI Rule, the IDI NPR would represent a significant change to their requirements, even if they are not required to file full IDI resolution plans.
– In his statement objecting to the IDI NPR, Vice Chairman Hill noted that he thought it was “disingenuous” to call the Group B biennial filings “informational filings” as those filings “would still include almost all the elements required of resolution plans, and, according to the economic analysis in the proposal, would be more burdensome than the resolution plans that banks above $100 billion in assets currently file under the existing rule.”[16]
– As a part of the IDI NPR release, the FDIC illustrates the comparative requirements for Group A IDI submissions, Group B IDI submissions and Group A and B interim supplements [17]; that illustrative chart is provided here.
– Credibility assessment. The IDI NPR would set out a new two-prong approach to the credibility criteria the FDIC would use to review resolution plan submissions.
– The first prong would provide that a submission by a Group A IDI would be deemed not credible 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 IDI in resolution, and address potential risks of adverse effects on U.S. economic conditions or financial stability.
– The second prong is similar to the standard of review currently in place under the IDI Rule. Under this prong, a submission would be deemed not credible if the information and analysis in it are not supported with observable and verifiable capabilities and data, and reasonable projections, or if the IDI fails to comply in any material respect with its filing requirements.
– Engagement and capabilities testing. The IDI NPR would provide enhanced capacity for the FDIC to engage directly with IDIs regarding the content of their submissions and test their described capabilities.
– The IDI NPR would expand the FDIC’s ability to engage with IDIs, establishing that information and personnel access would be at the discretion of the FDIC and would not be limited to information and personnel access necessary to assess the credibility of the resolution plan.
– The IDI NPR would also allow the FDIC to require an IDI to demonstrate that it can perform the capabilities described, or required to be described, in a submission. However, while the IDI NPR does describe the type of capabilities the FDIC might test, it does not describe the process the FDIC would use to engage in such capabilities testing.
– Enforcement. The IDI NPR would codify that if an IDI’s submission does not pass FDIC review and the IDI fails to resubmit the submission within the prescribed timeline or if a resubmitted submission fails adequately to address identified weaknesses, the IDI could be subject to enforcement action under existing FDIC statutory authorities.
– Transition. The FDIC intends to take into account elements of the IDI NPR even before it is formally approved in a final form, and, once it is finalized, intends to transition to full application of its requirements at a quicker-than-expected pace.
– The FDIC stated in the preamble that while the IDI NPR has not been adopted yet, feedback on IDI resolution plan submissions prior to the final rule will nonetheless focus on IDI Rule provisions that would remain relevant under the IDI Rule, as amended, if the IDI NPR is adopted as a final rule.
– Once the IDI NPR is finalized, the FDIC indicates that approximately half of the Group A IDIs would be required to submit resolution plans and that all of the Group B IDIs would be required to submit informational filings at least 270 days from the final rule’s effective date. The other half of the Group A IDIs would be expected to file their first resolution plans under the amended rule within two years of the effective date. This 270-day timeline is a shorter period than the one-year transition period often applied with resolution plan rules and guidance.
IV. Domestic and FBO Guidance Proposals
The FDIC and FRB jointly proposed the Domestic Guidance Proposal and the FBO Guidance Proposal to provide additional guidance regarding section 165(d) resolution plans for domestic triennial full filers and foreign triennial full filers, respectively. The Guidance Proposals follow in the footsteps of existing FDIC and FRB guidance for U.S. GSIBs (biennial filers) (the “U.S. GSIB Guidance”)[18] and for certain large FBOs that are foreign triennial full filers[19] (the “FBO Guidance” and collectively with the U.S. GSIB Guidance, the “Previous Guidance”).[20] If finalized, the FBO Guidance Proposal would supersede the current FBO Guidance and, as such, would apply to all foreign triennial full filers. The Guidance Proposals establish the FDIC’s and FRB’s expectations around, among other things, capital, liquidity, governance mechanisms, operations, legal entity rationalization and separability, and IDI resolution, as applicable. The Guidance Proposals each distinguish between organizations using an SPOE strategy and those using an MPOE strategy. The FDIC and FRB have not yet indicated whether they intend more broadly to propose revisions to the 165(d) resolution planning rule for holding companies.[21]
Below, we discuss certain key takeaways from the Guidance Proposals, highlighting in particular where the Guidance Proposals diverge from the Previous Guidance:
– Scope of application. As noted, the Guidance Proposals would apply to domestic and foreign triennial full filers, which includes Category II and Category III domestic banking organizations and FBOs. The Guidance Proposals would not apply to or explicitly amend the U.S. GSIB Guidance, and there is no indication whether the FDIC and FRB intend to propose conforming changes to the U.S. GSIB Guidance.
– Domestic SPOE guidance mirrors the U.S. GSIB Guidance. The guidance for domestic triennial full filers with an SPOE strategy largely tracks the existing U.S. GSIB Guidance, which addresses resolution only under an SPOE strategy (the preferred resolution strategy for each of the U.S. GSIBs). As the FDIC and FRB indicate, however, no domestic filers in this category currently utilize an SPOE strategy. It is unclear whether, in connection with the LTD NPR, the Agencies expect large regional banks to migrate toward an SPOE resolution strategy for their 165(d) resolution plans.
– MPOE guidance is less extensive than SPOE guidance. While all domestic triennial full filers and many foreign triennial full filers currently utilize an MPOE strategy in their resolution plans, the MPOE provisions in the Guidance Proposals are less extensive than in the SPOE sections. For example, with regard to liquidity, MPOE organizations would be advised only to “include analysis and projections of a range of liquidity needs during resolution, including intraday; reflect likely failure and resolution scenarios; and consider the guidance on assumptions.” Firms with an SPOE strategy, meanwhile, would need to abide by more prescriptive requirements for Resolution Liquidity Adequacy and Positioning (“RLAP”) and Resolution Liquidity Execution Need. Some sections, such as those on capital and governance, do not contain any guidance for MPOE organizations.
– Organizations utilizing an MPOE strategy would be required to include specific discussion of resolving the IDI. To the extent a triennial full filer, whether domestic or foreign, with an MPOE strategy contemplates the separate resolution of a U.S. IDI that is a material entity, the organization would need to discuss how this could be achieved to substantially mitigate the risk of serious adverse effects on financial stability while also complying with the statutory and regulatory requirements governing IDI resolution. The Guidance Proposals specifically discuss how an organization should approach (i) a payout liquidation strategy or a bridge depository institution strategy, as applicable, and (ii) exiting from IDI resolution proceedings.
– Updated assumption guidance. The discussion of assumptions in the Guidance Proposals is largely consistent with that in the Previous Guidance, but the Guidance Proposals would update the discussion in three key ways. Some of these assumptions were updated in response to recent regional bank failures:
– First, the Guidance Proposals state that MPOE organizations should consider the likelihood that there would be a diminution of the organization’s liquidity buffer or depletion of capital in the stress period prior to filing for bankruptcy, including due to high unexpected outflows of deposits and increased liquidity requirements from counterparties, similar to proposed changes in the IDI NPR.
– Second, the Guidance Proposals state that organizations should not submit resolution plans that assume the use of the systemic risk exception to the least-cost test in the event of an IDI resolution.
– Third, the Guidance Proposals recommend that resolution plans support any assumptions that the organization will have access to the Discount Window and/or other borrowings during the period immediately prior to entering bankruptcy, including with a discussion of the operational testing conducted to facilitate access in a stress environment.
– Reversion to the proposed version of the FBO Guidance. In a number of places discussing organizations with a U.S. SPOE strategy (e.g., capital, liquidity, governance mechanisms and separability), the Proposed Foreign Guidance reverts to the proposed version of the FBO Guidance, rather than the final version that is currently in place for certain FBOs. Notably, this reintroduces “Resolution Capital Adequacy and Positioning” and RLAP requirements, which were removed following the comment period in the FBO Guidance. The FDIC and FRB state that this reversion is intended “to better support U.S. SPOE strategies and in light of the LTD proposal,” and the FDIC staff memorandum points to the recent experience with Credit Suisse Group AG as another motivation for re-inclusion.
– Transition. The FDIC and FRB expect applicable filers to take the final guidance into account in their resolution plans “as soon as practicable,” and the next plans for triennial full filers are due July 1, 2024. While the Guidance Proposals did not yet provide an extension for these submissions, they did note that the FDIC and FRB are considering providing a short extension of the next resolution plan submission date, with the expectation that these plan submissions would nonetheless be due sooner than one year after the Guidance Proposals are published in final form.
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[1] See, e.g., Martin J. Gruenberg, Resolution of Large Regional Banks – Lessons Learned, remarks at The Brookings Institution, Center on Regulation and Markets (Aug. 14, 2023), available here; Martin J. Gruenberg, Basel III Endgame, remarks at the Peterson Institution for International Economics (Jun. 22, 2023), available here. Our blog post previews the issuance of Tuesday’s proposals, available here.
[2] Agencies, Long-term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions (Aug. 29, 2023), available here.
[3] FDIC, Resolution Plans Required for Insured Depository Institutions with $100 Billion or More in Total Assets; Informational Filings Required for Insured Depository Institutions with At Least $50 Billion but Less Than $100 Billion in Total Assets (Aug. 29, 2023) [hereinafter “IDI Rule Preamble”], available here.
[4] FDIC and FRB, Guidance for Resolution Plan Submissions of Domestic Triennial Full Filers (Aug. 29, 2023), available here.
[5] FDIC and FRB, Guidance for Resolution Plan Submissions of Foreign Triennial Full Filers (Aug. 29, 2023), available here.
[6] For more information on the Basel III endgame and GSIB surcharge proposals, please see our blog post, available here.
[7] Martin J. Gruenberg, An Underappreciated Risk: The Resolution of Large Regional Banks in the United States, remarks at The Brookings Institution, Center on Regulation and Markets (Oct. 16, 2019), available here.
[8] Michael J. Hsu, Financial Stability and Large Bank Resolvability, remarks before the Wharton Financial Regulation Conference 2022 (Apr. 1, 2022), available here.
[9] Resolution-Related Resource Requirements for Large Banking Organizations, 87 Fed. Reg. 64170 (Oct. 24, 2022), available here. For additional background on resolution planning, see our blog post on large bank oversight and M&A ramifications from the recent bank failures, available here.
[10] Triennial full filers include Category II and Category III domestic banking organizations and FBOs.
[11] Agencies, Fact Sheet on Proposed Rule to Require Large Banks to Maintain Long-Term Debt to Improve Financial Stability and Resolution (Aug. 29, 2023), available here.
[12] Though Category IV banking organizations are not currently subject to the SLR, the Agencies’ Basel III endgame proposal would extend the requirement to these institutions.
[13] Under an SPOE strategy, only the top-tier bank holding company would enter into a resolution proceeding; operating subsidiaries would continue on a going-concern basis. Under an MPOE strategy, a banking organization’s material legal entities would generally enter their own separate resolution proceedings, with an organization’s U.S. IDI being placed into an FDIC-led resolution.
[14] IDI Rule Preamble, supra, note 3, at 7-8.
[15] Travis Hill, Statement on the Proposed Amendments to the IDI Resolution Planning Rule (Aug. 29, 2023), available here.
[16] Id.
[17] James L. McGraw, Publication of Federal Register Notice Regarding Long-Term Debt for Certain Insured Depository Institutions, memorandum to the FDIC board of directors (Aug. 29, 2023), available here, p. 25.
[18] Final Guidance, 84 Fed. Reg. 1438 (Feb. 4, 2019), available here.
[19] Guidance for Resolution Plan Submissions of Certain Foreign-Based Covered Companies, 85 Fed. Reg. 83557 (Dec. 22, 2020), available here.
[20] Notably, the recent proposal by the Agencies to amend certain systemic indicators on the FR Y-15 is predicted to move certain foreign banking organizations into Category II or III, subjecting them to 165(d) resolution plan requirements and the FBO Guidance Proposal. For more, see our blog post on the Basel III endgame proposal, available here.
[21] For predictions on how the Agencies may seek to revise the 165(d) resolution planning rule, see our blog post, available here.
