Key Points from the US G-SIBs’ Resolution Plan Progress Reports

This week, the Federal Reserve and the FDIC (collectively, “Agencies”) released the public sections of the resolution plan progress reports submitted on October 1st by the eight largest US banking institutions (“October Submissions”). [1] In April, the Agencies jointly determined five of the eight banks’ 2015 resolution plans to be “not credible,” while all eight were found to have either “deficiencies,” “shortcomings,” or both. [2] The Agencies identified the deficiencies and shortcomings across six areas, [3] and also issued significant new guidance on these areas for incorporation in the banks’ next full submission. The banks had until October 1st to remediate all deficiencies cited in the April feedback, but were given until their next full resolution plan filing date (which was pushed back by one year to July 1, 2017) to fully address shortcomings. In their October Submissions, the banks were required to include a description of how deficiencies were remediated and the actions taken so far to address shortcomings. Each of the five banks with plans determined to be not credible declared in their October Submission that they believe their deficiencies are now remediated. Time will tell if the Agencies agree.

The October Submissions’ public sections provide new insight into the resolution plans of the largest US banks.

Just as the Agencies provided much more information in their April feedback, [4] the banks responded, generally, with significantly greater transparency in their progress reports. For example, firms that had deficiencies in the identification and mapping of their critical services often provided substantive descriptions of their approach and tools employed to remediate this issue. Additionally, most banks with deficiencies in the area of funding and liquidity forecasting for resolution provided a fairly detailed, albeit high level, description of the improvements made to address this deficiency. However, given the complexity of resolution planning and the sensitivity of underlying financial data, it is not surprising that disclosure on funding and liquidity varied meaningfully across the banks. While most of the firms with deficiencies focused their October Submissions on how they remediated those deficiencies, some of the firms without deficiencies also provided considerable new detail on the Agencies’ six areas of focus. In particular, many of the banks provided meaningful detail on their legal entity rationalization criteria.

There is evidence of real change to banks’ legal entity structures.

Four of the five 2015 plans found to be not credible were cited for deficiencies in legal entity rationalization, and the Agencies specifically indicated the need for more specificity in this regard. In response, the banks’ October Submissions show evidence of actual changes made, and they appear to be directionally aligned with the Agencies’ guidance. Banks cited the elimination of dormant and redundant legal entities, and some also indicated that they moved subsidiaries from being directly owned by the holding company to instead being owned by an operating subsidiary. Further, seven of the eight banks now have a Single Point of Entry (SPOE) strategy, [5] so many of them provided meaningful detail around the legal entity organization changes needed to make the SPOE strategy feasible (e.g., creation of intermediate holding companies). [6] In addition, many banks also described their execution of support agreements to facilitate the ability of the holding company to transfer resources during severe stress, which will allow them to maintain the operational continuity of the operating subsidiaries and thus successfully execute an SPOE.

The Board of Directors is getting more engaged.

A number of banks indicated that they prepared execution playbooks for their Board of Directors to ensure that they have a better understanding of the extensive preparation required for the parent bank holding company to file a voluntary bankruptcy petition. Additionally, some banks indicated that they have conducted Board training sessions.

Resolution planning requires extensive human capital.

The October Submissions provided new public insight into the broad group of bank staff, management, and governing committees involved in resolvability efforts (including their roles and responsibilities). These human resources are not only dedicated to preparing and submitting the plan, but must also ensure that resolvability is ingrained in business-as-usual business decisions and strategies. Therefore, although a number of banks have been indicating a substantial increase in the number of staff dedicated to resolution efforts, it is now evident that this dedicated staff is really only a fraction of the resource commitment.

More banks’ senior executives are taking responsibility.

Initially, many banks handled resolution planning as a special project, and the individual assigned to spearhead resolution planning often had a multitude of other responsibilities. The October Submissions indicate that several banks have assigned more senior management time to resolution planning. Further, the banks made clear that many members of executive and senior management have significant and specific resolution planning responsibilities, often in guiding, reviewing, and challenging resolution plan components and related resolvability initiatives.

The October Submissions are easier for the public to understand than previous public portions.

Overall, the October Submissions provide a more straightforward explanation of resolution planning activities and objectives than any of the prior years’ public sections, despite the inclusion of more information. Most importantly, nearly all of the banks organized their submission by presenting each deficiency or shortcoming followed by the action taken to address it. This is a distinct departure from the organization of the public sections for the annual resolution plans, for which most banks merely followed the order of the Agencies’ related rule. In following this new structure, all five of the banks with plans found not credible addressed each of their deficiencies head-on (instead of burying or obscuring the central problem). This is likely attributable to the approach taken by the Agencies in communicating the deficiencies to the banks, and disclosing most of the feedback letter publicly. Finally, many of the banks provided clear explanations of the requirements and actions taken, including a glossary of resolution planning-specific abbreviations and terms (e.g., RLEN or RLAP).

The industry is gravitating toward similar solutions for some deficiencies.

When the resolution planning rule was passed in 2011, banks struggled to figure out what was really expected of the requirement to “map” the exchange of services across the organization. The Agencies noted deficiencies in the identification and mapping of shared services in a number of the banks’ 2015 plans, and indicated an expectation for banks to clearly indicate which critical services are shared across their organizations and how continuity would be ensured. The October Submissions suggest that banks are increasingly gravitating toward similar solutions and building tools to automate this extremely arduous task. Similarly, whereas in the past banks may have had distinctly different approaches to addressing the requirement to adopt legal entity criteria, the October Submission suggests that the criteria are becoming more similar. However, approaches to forecasting capital, funding and liquidity for resolution do not yet show the same gravitational pull, which may be attributable to the fact that detailed guidance on these topics is relatively new (and will likely evolve further).

Feedback is unlikely to come quickly.

It would take a joint determination by both Agencies that deficiencies have not been remediated in order to impose penalties on any of the five banks with plans found not credible. If this joint determination occurred, Federal Reserve (Fed) Chair Janet Yellen recently testified that the Fed is ready to impose tougher capital requirements. However, agreement between the two Agencies has taken considerable time in the past, so we believe such agreement will take many weeks (with only a 50% chance of coming this year). Reaching agreement will be particularly difficult for these October Submissions given the various options the Agencies have for providing feedback (ranging from “remedied” to “not remedied,” with lots of room in the middle to defer final decision making). This said, the clock is ticking on the Agencies to provide feedback—if the feedback takes too long, it may come too late for firms to make adjustments by July 1st.

More hurdles yet to come.

The October Submissions clearly indicate two things: (a) the banks, especially those with deficiencies, completed an enormous amount of work between April and October and (b) the banks still have an even greater amount of work to do, much of which must be completed by July 2017. The banks must now focus their energy on remediating their remaining shortcomings and addressing the enhanced guidance for their 2017 plans provided by the Agencies in April. We believe that key areas of focus for both banks and the agencies include enhancements to liquidity modelling [7] and completing the legal, structural, and operational changes needed to execute the plans from entry into resolution through completion of the ultimate exit. We expect the banks’ 2017 plans to be carefully reviewed for new deficiencies and shortcomings against the enhanced 2017 standards, with a continued risk of receiving a “not credible” determination. However, July is just the next hurdle of many. Given the pattern established during the past several years, it is likely that resolution planning and resolvability requirements will continue to be refined and enhanced. Even as banks meet growing expectations, we expect resolvability to remain a significant focus of supervisors, with a shift toward ongoing testing and validation to ensure that solutions remain feasible.

What’s next for resolution planning?

In addition to their review of the October Submissions, the Agencies still have a full plate of resolution plan reviews and rulemakings. These are the three main items to look out for:

Feedback for foreign banks:

Fifteen months after filing their 2015 resolutions plans, the largest foreign banking organizations (FBOs) still have not received feedback on those plans or guidance for their plans due in 2017. [8]

With less than nine months remaining before their next filing deadline, we recommend that FBOs apply the lessons from the feedback provided to the US G-SIBs and continue to make progress on their resolution practices. The Agencies are no doubt feeling the pressure to provide this feedback, since fifteen months is longer than any prior resolution feedback has taken.

Updates for December filers:

Over the summer, the Agencies provided December-filing banks with various forms of relief, either by delaying their next filing until December 2017 (for the banks with significant US operations) or by reducing the content required for those plans still due in December 2016. [9] The December-filing banks have also not yet received feedback on their 2015 plans, and we expect that other priorities for the Agencies will result in a further delay of feedback and additional guidance.

Rulemaking ahead:

The Agencies still have a number of important resolution-related rules to finalize, in particular: total loss absorbing capacity (TLAC) and clean holding company requirements, stays on qualified financial contract (QFC) termination rights, deposit insurance calculation, and QFC record keeping. [10] Of these four major rulemakings, we expect the Agencies will be unable to complete more than two this year.

Endnotes

1The eight US G-SIBs were required to submit remediation progress plans by the Agencies in their feedback to the G-SIBs’ 2015 plans. See our post, Agencies’ Resolution Plan Feedback (April 2016).(go back)

2The Agencies cited “shortcomings” in every plan except for Wells Fargo’s. Although shortcomings are less serious than deficiencies (and, unlike deficiencies, do not alone constitute a determination of not credible), they need to be fully addressed by July 1, 2017.(go back)

3The six areas are capital, liquidity, governance mechanisms, operational capabilities (including shared services), legal entity rationalization (including separability), and derivatives/trading activities.(go back)

4For the first time, the Agencies published redacted versions of the specific feedback letter provided to each bank, along with a summary of their review process and results.(go back)

5 BNY Mellon adopted the SPOE strategy since the 2015 plan was submitted, while Wells Fargo is the only bank that has a Bridge Bank strategy. See PwC’s Regulatory brief, Resolution: Single point of entry strategy ascends (July 2015).(go back)

6 See PwC’s Regulatory brief, Foreign banks: Resolution plans meet IHCs (February 2016).(go back)

7 See PwC’s A closer look, Intraday liquidity: Managing beyond bankers’ hours (October 2016).(go back)

8 In June, the Agencies delayed the filing date for the largest FBOs by one year to July 1, 2017. See PwC’s First take, Five key points from the Agencies’ FBO resolution plan announcements. (June 2016).(go back)

9 See the publication in note 8 for details on the Agencies’ announcement to allow 84 FBOs with less than $50 million in US assets to file a “reduced content” plan for each of the next three years.(go back)

10 See PwC’s First take, Ten key points from the Fed’s proposed Total Loss-Absorbing Capacity (November 2015), and PwC’s Regulatory briefs, Resolution: Deposit calculations on demand (March 2016) and Resolution preparedness: Do you know where your QFCs are? (March 2015).(go back)