On June 20, 2024, the Federal Deposit Insurance Corporation (FDIC) adopted final amendments to its resolution planning requirements for FDIC-insured depository institutions (IDIs) with US$50 billion or more in total assets under the FDIC's regulations at 12 CFR 360.10 (IDI Resolution Plan Rule). IDIs with US$100 billion or more in total assets are subject to certain requirements as Group A CIDIs, and IDIs with total assets of at least US$50 billion but less than US$100 billion are subject to certain information filing requirements as Group B CIDIs. The FDIC has been working on a revamp of its resolution planning requirements for IDIs since 20191 but the final rule supersedes all previous FDIC guidance on the topic and lifts an FDIC moratorium on resolution planning requirements for Group B CIDIs that has been in place since 2018.
As discussed in our September 2023 Advisory, the final rule builds upon an earlier notice of proposed rulemaking, which sought to strengthen regulatory oversight over large regional banks following the collapse of three large banking organizations in the spring of 2023. In the adopting release to the final rule, the FDIC suggests that, at the time of the collapse, the agency "lacked important resolution planning information" pertaining to these three banking organizations. However, "current and thorough resolution planning information," according to the adopting release, "would have facilitated the FDIC's preparations to effectively and efficiently market the failed IDIs." The final rule modifies the content and timing of full submissions, as well as the agency's credibility assessment of full submissions.
Key Changes From the Proposed Rule
Under the proposed rule, each CIDI would have been required to provide a full resolution submission, in either the form of a resolution plan or an informational filing, to the FDIC every two years. The final rule, however, adopted a three-year submission cycle for all CIDIs other than CIDI affiliates of U.S. global systemically important banking organizations (GSIBs).
Moreover, in response to comments to the proposed rule, the final rule incorporates an additional level of FDIC feedback — a significant finding — that rests between informal feedback and a finding of a material weakness. Whereas a material weakness arises when a CIDI's full resolution submission fails to meet the credibility criteria discussed above, a significant finding is a "weakness or gap that raises questions about the credibility of a CIDI's full resolution submission but does not rise to the level of material weakness." The adopting release to the final rule states that the difference between a material weakness and a significant finding "is one of degree of severity."
Amended Resolution Planning Requirements
First issued in 2012, the IDI Resolution Plan Rule requires IDIs with over US$50 billion in total assets to submit periodic resolution plans that facilitate the FDIC's readiness to resolve an IDI, and its subsidiaries, as receiver under the Federal Deposit Insurance Act, in the event of insolvency.2 The IDI Resolution Plan Rule was adopted under the FDIC's general authority under the FDI Act. The IDI Resolution Plan Rule is distinct from the "living wills" resolution plan requirement under Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) and the implementing regulations of the Federal Reserve Board and FDIC (Federal Reserve/FDIC Resolution Rule), which currently apply to large depository institution holding companies with US$250 billion or more in total assets and their subsidiaries, as well as nonbank financial companies that are designated as systemically important.3 The premise of both resolution planning rules is at all times to have in place a workable, well thought-out plan to resolve a large institution in the event of insolvency, so that the federal banking regulators do not have to come up with one on the fly in a crisis. Both the IDI Resolution Plan Rule and the Federal Reserve/FDIC Resolution Rule require covered banking organizations to submit their resolution plans for regulatory review and approval or disapproval.
Timing for Compliance
The FDIC will notify CIDIs, at a date to be determined by the agency, of the deadline for the first full resolution submission or interim supplements. For Group A CIDIs, that date will be at least 270 days from October 1, 2024, the effective date of the final rule, and for Group B CIDIs, the initial submission due date will be at least one year from October 1, 2024.
Group A CIDIs
The final rule requires most Group A CIDIs to submit resolution plans on a triennial basis, with interim supplements expected each year where a resolution plan is not filed. Group A CIDIs affiliated with U.S. GSIBs must submit resolution plans on a biennial basis.
Among other requirements, Group A CIDI resolution plans must incorporate an "identified strategy" for resolution of the CIDI from the point of failure through the sale or disposition of the CIDI's franchise. While Group A CIDIs are allowed to develop resolution plans with an identified strategy that is most optimal for the institution, the default identified strategy for Group A CIDIs is "the bridge bank approach." The "bridge bank approach" under the final rule would require a Group A CIDI to provide for the establishment and stabilization of a bridge depository institution (BDI) and an exit strategy from the BDI, such as "an orderly wind-down of certain business lines and asset sales, an exit via restructuring and subsequent initial public offering or other capital markets transaction, or another strategy appropriate to the size, structure, and complexity of the CIDI." IDIs are not required to demonstrate that their identified strategy is the "least-costly" to the Deposit Insurance Fund (DIF) nor does the identified strategy have to be less costly to the DIF than liquidation.
Group B CIDIs
Under the final rule, Group B CIDIs must submit a full informational filing to the FDIC on a triennial basis, with interim supplements expected each year when an informational filing is not submitted. Unlike Group A CIDIs, the final rule does not require Group B CIDIs to include an "identified strategy" from the point of failure through the sale or disposition of the CIDI's franchise. However, Group B CIDI filings must include all other content elements of a full resolution submission of a Group A CIDI resolution plan, except for an executive summary.
Similar to Group A CIDIs, Group B CIDI informational filings must include a discussion of any material changes from the prior full resolution submission or interim supplement, or an affirmation that no material change has occurred.
Credibility Standard
The final rule requires that a full resolution submission, either in the form of a resolution plan by a Group A CIDI or an informational filing by a Group B CIDI, must meet a credibility standard consisting of two prongs.
- Under the first prong, the FDIC could find a resolution plan to be not credible if the identified strategy does not "provide timely access to insured deposits, maximize value from the sale or disposition of assets, minimize any losses realized by creditors, and address potential risks of adverse effects on U.S. economic conditions or financial stability."
- Under the second prong, the FDIC could find a resolution plan to be not credible if the information and analysis in the full resolution submission "are not supported with observable and verifiable capabilities and data and reasonable projections, or the CIDI fails to comply in all material respects with the requirements of the rule."
Whereas the first prong is limited to Group A CIDIs, the second prong applies to both Group A CIDIs and Group B CIDIs. The final rule does not measure interim supplements against the credibility standard.
Other Considerations
FDIC Vote Along Party Lines
Adoption of the final rule fell along a 3-2 split between Democratic and Republican members of the FDIC's Board of Directors. FDIC Chairman Martin J. Gruenberg stated that, in light of the collapse of the three large banking organizations last year, the final rule "materially improve[s] the ability of the FDIC to prepare for and execute resolutions of the largest banks in a manner that preserves stability in the banking system and reduces cost to the Deposit Insurance Fund and other stakeholders." Disagreeing with Gruenberg, FDIC Vice Chairman Travis Hill argued that the final rule "goes far beyond those lessons," asserting that, for example, "the credibility determinations under the new framework are too subjective, and transform what should be a less formal, iterative process into a crude and binary assessment of CIDIs' resolution readiness." Vice Chairman Hill also stated at the time the amendments were proposed in 2023 that he is "skeptical that the FDIC's authority in this area extends to requiring divestitures or other major business or structural changes for the purpose of making a bank more resolvable,"4 an apparent allusion to the "major questions doctrine" currently used by the U.S. Supreme Court in review of agency rulemakings to decide whether Congress has granted the agency with sufficiently specific authority to exercise the sort of power embedded in the rule.
OCC Proposed Expansion to Recovery Planning Guidelines
Shortly following adoption of the IDI Resolution Plan Rule, the Office of the Comptroller of the Currency (OCC) proposed to expand its enforceable recovery planning guidelines (Guidelines) pertaining to certain large insured national banks, insured federal savings associations, and insured federal branches of foreign banks. Since 2018, the Guidelines have applied to covered banking organizations with average total consolidated assets of US$250 billion or more. The proposed rule, however, would expand the Guidelines to institutions with average total consolidated assets of US$100 billion or more, as well as introduce requirements related to non-financial risk (including operational and strategic risk) and testing requirements that "simulate severe financial and non-financial stress scenarios." In the Notice of Proposed Rulemaking, the OCC justified the proposed expansion of the Guidelines by appealing to the collapse of three large banking organizations in the spring of 2023, which "highlighted the complexity and interconnectedness of some banks not covered by the [current] Guidelines."5
Federal Reserve/FDIC Resolution Rule Activity
As discussed above, separate from the FDIC's final IDI rule, Section 165(d) of the Dodd-Frank Act, as amended, mandates that certain bank holding companies and nonbank financial companies submit resolution plans for the "rapid and orderly resolution" of such companies.6 Whereas the Federal Reserve/FDIC Resolution rule focuses on the resolution of an organization as a whole, the FDIC's final IDI rule focuses exclusively on the CIDI and its subsidiaries, as well as the "strategic analysis and information needed to support a resolution using the FDIC's traditional resolution tools under the FDI Act."
Recently, the FDIC and Federal Reserve Board determined that four of the eight largest and most complex banks filed resolution plans under Section 165(d) of the Dodd-Frank Act that included shortcomings. Under Section 165(d) and the holding company resolution plans, each of the eight banks must submit a subsequent targeted resolution plan on or before July 1, 2025 (2025 Plan). For the four banks with an identified shortcoming, the agencies will determine if each bank has satisfactorily addressed the shortcoming in its 2025 Plan. If the FDIC and Federal Reserve Board jointly decide that the shortcoming is not satisfactorily addressed in the 2025 Plan, the agencies may jointly determine that the plan is not credible.
Takeaways
- For banks with total assets of US$100 billion and over, the new resolution rule provides a substantial increase in what the agencies will expect to see in resolution plans. For banks with total assets of US$50 billion and over that have been subject to a moratorium for several years, these requirements will create new expectations.
- For banks that crossed the US$50 billion in total assets threshold in the past five years, the new resolution rule will significantly increase the initial and ongoing compliance costs. Banking organizations that are under the thresholds established by the new resolution rule should also be aware of the new expectations. Growth may bring them into these categories, or the new resolution rule may be indicative of the approach the agencies plan to take for smaller institutions through the supervisory process.
- Despite the fact that the earliest date for submissions under the new rules is well over a year out, early planning and data aggregation is essential given the extent of the work involved to prepare the submissions. Firms will need to staff appropriately to meet these new standards and to prepare for more frequent and vigorous engagement with the FDIC. This is underlined by the fact that certain expectations that were formerly in the form of guidance are now in the form of a rule. The FDIC reiterated its enforcement authority over untimely and inadequate resolution plans as violations of the resolution planning rule and, at the FDIC's discretion, Section 8 of the Federal Deposit Insurance Act.
Footnotes
1. Resolution Plans Required for Insured Depository Institutions With $50 Billion or More in Total Assets, 84 Fed. Reg. 16620 (Apr. 22, 2019).
2. 12 C.F.R. § 360.10.
3. 12 U.S.C. § 5365(d); 12 C.F.R. §§ 243, 381.
4. Statement by Vice Chairman Travis Hill on the Proposed Amendments to the IDI Resolution Planning Rule at n.3, Fed. Deposit Ins. Corp. (Aug. 29, 2023).
5. OCC Guidelines Establishing Standards for Recovery Planning by Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches, Office of the Comptroller of the Currency (June 24, 2024).
6. 12 U.S.C. § 5365(d).
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