Henry M. Fields, Marc-Alain Galeazzi, Oliver I. Ireland, Jiang Liu, Barbara R. Mendelson, and Mark R. Sobin
Financial Services and Finance
The Federal Reserve and the FDIC published proposed changes to resolution plan (or “living will”) requirements applicable to U.S. and foreign banking organizations. The regulatory changes are necessary because the 2018 Regulatory Relief Act raised the asset thresholds for applicability of the living will requirements. The proposal would apply different filing frequency and informational content requirements based on the risk a firm poses to the U.S. financial system.
On April 8 and 16, 2019, the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Board”) and the Federal Deposit Insurance Corporation (“FDIC” and, together with the Federal Reserve, the “Agencies”) published a long-awaited notice of proposed rulemaking regarding resolution plans (“Resolution Plan Proposal”). The Resolution Plan Proposal would amend and restate regulations jointly issued by the Agencies implementing the resolution plan requirements of section 165(d) of the Dodd-Frank Act (the “Regulations”). The Regulations need to be amended to address changes made by the Economic Growth, Regulatory Reform, and Consumer Protection Act of 2018 (the “Regulatory Relief Act”). The Regulatory Relief Act raised the $50 billion total consolidated asset threshold for general application of the living will requirements to $250 billion in total consolidated assets; provides the Board with discretion to apply the requirements to firms with total consolidated assets of at least $100 billion but less than $250 billion; and eliminated the filing requirements for firms with less than $100 billion in total consolidated assets.
The Agencies’ supplementary information summarizes the Resolution Plan Proposal as “(a) a proposal by the Board to establish risk-based categories for determining the application of the resolution planning requirements to certain U.S. and foreign banking organizations, consistent with section 401 of the Regulatory Relief Act, and (b) a proposal by the [A]gencies to extend the default resolution plan filing cycle, allow for more focused resolution plan submissions, and improve certain aspects of the [Regulations].” The comment period is expected to run until June 21, 2019.
The Regulatory Relief Act requires that three types of firms file resolution plans: (i) U.S. and foreign banking organizations with $250 billion or more in total consolidated assets; (ii) U.S. Global Systemically Important Banks (“U.S. GSIBs”); and (iii) nonbank financial institutions designated by the Financial Stability Oversight Counsel (“FSOC”) under section 113 of the Dodd-Frank Act. In addition, the Regulatory Relief Act grants the Board the authority to require firms with $100 billion or more and less than $250 billion in total consolidated assets to file a resolution plan.
The Resolution Plan Proposal would apply resolution plan requirements to firms that have more than $250 billion in total consolidated assets and would be subject to Category I, II, and III standards under the tailoring proposals, which were published by U.S. regulators to revise the framework for determining the prudential standards that should apply to large U.S. banking organizations and FBOs. To identify firms with total consolidated assets between $100 billion and $250 billion that would be required to file a resolution plan, the Resolution Plan Proposal would shift from a size-based approach to a combination of size and other risk-based indicators that are also used in the tailoring proposals. In addition, the Resolution Plan Proposal would require certain “Other FBOs” to file resolution plans on a regular basis.
For purposes of this overview, the term “total consolidated assets” is used for an FBO in lieu of the term “combined U.S. assets” as set forth in the Resolution Plan Proposal. The calculation of the risk-based indicators (i.e., cross-jurisdictional activity, nonbank asset, weighted short-term wholesale funding, and off-balance sheet exposure) for an FBO would be based on its “combined U.S. operations.”
Category I standards would apply to all U.S. GSIBs.
Currently, eight firms belong to Category I: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.
Category II standards would apply to U.S. firms and FBOs with:
Category III standards would apply to U.S. firms and FBOs with:
The following 13 firms currently belong in Category II or III: Barclays, Capital One, Credit Suisse, Deutsche Bank, HSBC, Mitsubishi UFJ, Mizuho, Northern Trust, PNC Financial, Royal Bank of Canada, Toronto Dominion, UBS, and US Bancorp.
In addition, FBOs with $250 billion or more in total global consolidated assets that are not subject to Category II or Category III standards (“Other FBOs”) would be required to file a living will. A list of the 53 FBOs that currently meet this requirement is provided in the Agencies' Presentation Materials.
The following firms would not have to file a resolution plan, unless directed by the Federal Reserve:
Resolution Plan Types and Content
Under the Resolution Plan Proposal, there would be three different types of resolution plans, each with different informational content requirements:
Tailored resolution plans, which are currently available for certain bank-centric firms, would be eliminated without replacement.
However, the Agencies would retain the authority to request a full resolution plan from any company that is required to file a resolution plan (also called a “covered company”), to be submitted within a time period as specified by the Agencies. Regardless of the type of resolution plan, covered companies that received feedback from the Agencies for their previously submitted resolution plans would have to address that feedback in the next filing.
The Resolution Plan Proposal would require covered companies to provide notice to the Agencies within 45 days after a firm experiences an extraordinary event, such as a material merger, acquisition, or similar transaction, or a fundamental change to the covered company’s resolution strategy.
Full Resolution Plans
The Agencies expressed the view that firms as well as the Agencies, have gained familiarity with the format and content of full resolution plans currently required to be submitted under the Regulations and that the information requirements have proven themselves to be useful. For that reason, the Resolution Plan Proposal would not substantively modify the components or informational requirements for full resolution plans. However, the Resolution Plan Proposal lays out a process that permits (1) the Agencies to waive certain informational requirement for one or more firms; and (2) covered companies to apply for a waiver to exclude information that was included in a previous resolution plan.
Targeted Resolution Plans
Targeted resolution plans would be a subset of full resolution plans. A targeted resolution plan would have to provide certain key information regarding capital, liquidity, and any plans for executing any contemplated recapitalization. However, other sections required for a full plan would have to be included in targeted resolution plans only if there have been material changes since the previously filed resolution plan. Targeted resolution plans would also have to provide information about any area of interest identified by the Agencies in advance of the filing, as well as any changes to a covered company’s resolution plan resulting from changes in law, regulation, guidance, or feedback provided by the Agencies.
Reduced Resolution Plans
The Resolution Plan Proposal would codify the Agencies’ position, initially taken in 2016, that allows certain firms, including many FBOs with limited U.S. operations, to file reduced resolution plans. The informational requirements for a reduced resolution plan would consist only of material changes and improvements to the resolution plan strategies since the filing of a covered company’s previously submitted resolution plan.
Frequency of Filing
The Resolution Plan Proposal would divide covered companies into three different groups with regard to filing cycle length and type of resolution plan:
Biennial filers would have to file a resolution plan every two years, alternating between a full resolution plan and a targeted resolution plan. All Category I firms would be deemed biennial filers, and their first submission of a full resolution plan is due on July 1, 2019. The next resolution plan for biennial filers would be due on July 1, 2021, in the form of a targeted resolution plan.
Triennial Full Filers
All Category II and III firms would be deemed triennial full filers. Similar to biennial filers, triennial full filers would have to file full resolution plans and targeted resolution plans alternately; however, they would need to file only every three years. The first submission date for triennial full filers would be July 1, 2021, in the form a full resolution plan. The next submission date for triennial full filers would be July 1, 2024, in the form of a targeted resolution plan.
Triennial Reduced Filers
Triennial reduced filers (Other FBOs) would be required to file a reduced resolution plan every three years, starting on July 1, 2022.
Under the Resolution Plan Proposal, new filers, as well as triennial reduced filers that become triennial full filers, would have to file a full resolution plan on the date the next resolution plan is due for their respective group.
Critical Operations Methodology and Reconsideration Process
The Resolution Plan Proposal would establish a process for (a) the Agencies to identify critical operations of covered companies and rescind prior critical operations identifications; and (b) biennial filers and triennial full filers to identify their critical operations and to request reconsideration of operations that were previously identified by the Agencies as critical operations. Under the Resolution Plan Proposal, critical operations would be defined as “operations, including associated services, functions, and support, the failure or discontinuance of which would pose a threat to the financial stability of the United States.”
Clarifications to the Regulations
The Resolution Plan Proposal would provide certain clarifications to the current Regulations. Among other issues, the Resolution Plan Proposal addresses the following:
Questions and Alternative Scoping and Tailoring Criteria
In the Resolution Plan Proposal, the Agencies request comments to a total of 43 questions, spanning issues such as (i) the identification of firms with total consolidated assets of at least $100 billion but less than $250 billion that have to file a resolution plan; (ii) the use of the risk-based indicators; (iii) the submission cycles and content of the various resolution plans; (iv) the waiver process; (v) critical operations; and others. In addition, the Resolution Plan Proposal seeks comments on alternative scoping and tailoring criteria, similar to the ones suggested in the tailoring proposals.
The Resolution Plan Proposal is in line with the approach that the Agencies take with regard to the proposed framework for determining the prudential standards that apply to large U.S. and foreign banking organizations and ties the requirements for content and filing frequency of resolution plans to the risk that a covered company poses to the U.S. financial system. Although it can be expected that the final rule will deviate from the proposal, the Resolution Plan Proposal appears to be a step in the right direction and, in particular, would relieve many large FBOs with the smallest U.S. footprints and smaller U.S. banking institutions from the onerous task of preparing and filing detailed resolution plans on an annual basis that likely do not provide information relevant to any risk to the stability of the U.S. financial system.
 The Resolution Plan Proposal, a staff memorandum to the Board of Governors, and presentation materials used for the presentation of the Resolution Plan Proposal (“Presentation Materials”) are available on the Federal Reserve's website.In addition, on April 16, 2019, the FDIC published an Advanced Notice of Proposed Rulemaking regarding changes to the requirement for insured depository institutions (“IDIs”) with $50 billion or more in total consolidated assets to file resolution plans (12 CFR 360.10, the “IDI Rule”). In particular, the FDIC requests comments on two alternative approaches to (i) the creation of tiered resolution planning requirements based on an IDI’s size, complexity, and other factors; (ii) revisions to the frequency and required content of plan submissions, including elimination of plan submission for a category of smaller and less complex IDIs; and (iii) improvements to the process for periodic engagement between the FDIC and IDIs on resolution-related matters. The FDIC also seeks comments on whether to revise the $50 billion asset size threshold in the IDI Rule.
 12 C.F.R. pt. 243 (Federal Reserve); 12 C.F.R. pt. 381 (FDIC). Under the Regulations, bank holding companies and foreign banking organizations (“FBOs”) with total consolidated assets of $50 billion or more are required to file a resolution plan on an annual basis.
 Pub. L. No. 111-203, 124 Stat. 1376, 1426-1427; 12 U.S.C. 5365(d).
 On April 8, 2019, the Board separately and together with the FDIC and Office of the Comptroller of the Currency released two notices of proposed rulemaking to align prudential standards for FBOs (“FBO tailoring proposals”) with those that had been proposed for domestic banking organizations in October 2018 (“domestic tailoring proposal,” and, together with the FBO tailoring proposals, the “tailoring proposals”). The tailoring proposals are a result of ongoing efforts by the Agencies to identify areas where additional regulatory tailoring may be warranted. In addition, certain tailoring and changes to the scope of regulations are required by the Regulatory Relief Act. For further information on these two proposals please see our Client Alerts for the FBO Tailoring Proposals and the Domestic Tailoring Proposals.
 See Presentation Materials (Figure A: Resolution Plan Filing Groups).
 The Agencies determined that the notice of material event requirements under the current Regulations is too broad and suggest the much narrower concept of a defined “extraordinary event.”
 These submissions are subject to the requirements of the current Regulations.
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