Fed/FDIC Comments on Wave 3 Resolution Plans

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On July 28th, the FDIC and the Federal Reserve Board (together, “the regulators”) announced that they have provided private feedback on the resolution plans of 119 Wave 3 banking institutions [1] and the three systemically important non-bank financial institutions. [2] Unlike the regulators’ highly critical August 2014 public commentary on the 2013 resolution plans filed by Wave 1 banking institutions, [3] this week’s comments are largely silent on the regulators’ view of the plans’ adequacy:

  1. No public criticism: The regulators did not broadly criticize the credibility of the Wave 3 plans and were silent on whether any of the plans were inadequate or not credible. In light of the criticism in feedback provided last year for Wave 1 firms, we believe this silence indicates that the regulators judged the Wave 3 plans more favorably. This would not be surprising given the generally lower complexity and jurisdictional footprint of the Wave 3 firms, in addition to the Wave 3 firms’ business composition including far fewer investment banking, trading, clearing, settlement, and custody activities.
  2. Not all Wave 3 filers are created equal: The 119 Wave 3 banks are a diverse group. As we have previously observed, [4] many of these firms have just one material legal entity and may have only a few core businesses, especially the US operations of many foreign based organizations (“FBOs”). That the regulators did not provide even thematic public feedback suggests that the wide difference in business mix and structure across the Wave 3 banks makes it difficult to generalize about this group. Instead the regulators indicated that they provided specific feedback to each individual institution, some of which will require improvement.
  3. Lighter future load for most: The regulators provided good news to 90 of the 119 Wave 3 filers, lightening their 2015 plan requirements to focus only on material changes as compared to the 2014 plans. This development expands this group from 61 firms in 2014, further allowing the regulators to focus their resources on the resolvability of the largest, most complex filers.
  4. No new areas of resolvability concern for non-banks: While publicly silent on any key themes with respect to the Wave 3 banks, the regulators publicly indicated that they expect continued improvement from the three systemically important non-bank institutions. However, the focus areas of the increased detail and analysis is consistent with certain now familiar areas of regulatory concern—namely, key obstacles such as global cooperation, interconnectedness, and funding and liquidity.
  5. Non-banks to strengthen their public sections: The three non-bank institutions are instructed to enhance their public sections, just as the Wave 1 firms were. [5] Given the level of public discourse around the designation of these institutions as systemically important, it is not surprising that the pressure for greater resolution plan transparency would extend to this group. In contrast, the regulators said nothing regarding the public sections for the Wave 3 banks’ plans.

Endnotes:

[1] Wave 3 institutions are generally those with total US nonbank assets of less than $100 billion (and made their most recent plan filing on December 31, 2014). Wave 1 firms generally have $250 billion or more in US nonbank assets, while Wave 2 firms generally have between $100 billion and $250 billion in US nonbank assets.
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[2] These institutions are AIG, Prudential, and GE Capital. See PwC’s Regulatory brief, Nonbank SIFIs: FSOC proposes initial designations (June 2013).
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[3] See PwC’s First take, Resolution plan guidance to largest firms (August 2014).
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[4] See PwC’s Regulatory brief, Resolution planning: Category 3 debrief (January 2014).
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[5] See PwC’s Regulatory brief, Resolution: Single point of entry strategy ascends (July 2015).
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Appendix—Diversity of Wave 3 plan filers*

Total Wave 3 plans reviewed US-Domiciled FBOs with CIDI** FBOs with no CIDI, but more than 1 material entity FBOs with no CIDI, and 0 or 1 material entity FBOs filing first plan in 2014
119 16 5 22 72 4

*Based on December 31, 2014 public sections.
** CIDI refers to a banking subsidiary with more than $50 billion in total assets, known as a Covered Insured Depository Institution. See PwC’s First take, Resolution plan guidance for CIDIs (December 2014).

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