FDIC Living Wills
Last week the FDIC voted to approve two sets of rules creating the framework for the orderly dissolution of large, interconnected financial institutions. One set of rules, which will be issued jointly with the Federal Reserve Board, concerns bank holding companies and systemically important financial institutions. The second set of rules applies to insured depository institutions.
BHCs and SIFIs
The rules governing living wills for bank holdings companies (“BHCs”) and systemically important financial institutions (“SIFIs”) have yet to be published because the Federal Reserve Board has not voted on them. The FDIC, however, did provide a broad outline of what the rules will contain. First, it should be noted that the resolution of a BHC or SIFI would be governed by the U.S. Bankruptcy Code or similar insolvency regime, such as a state insurance liquidation statute. Second, only BHCs with assets totaling $50 billion or more and companies designated as SIFIs by the Financial Stability Oversight Council will be subject to the living will requirement.
The new rules will require a firm to describe how its operations could be resolved rapidly and in an orderly fashion in accordance with the bankruptcy laws. The plan must include a strategic analysis of its components, a description of the range of specific actions to be taken in the resolution, and an analysis of the company’s organization, material entities, interconnections and interdependencies, and management information systems. Submission of resolution plans will be staggered based on the asset size of a covered company’s U.S. operations. Companies with $250 billion or more in non-bank assets must submit plans on or before July 1, 2012; companies with $100 billion or more in total non-bank assets must submit plans on or before July 1, 2013; and companies that predominately operate through one or more insured depository institutions must submit plans on or before December 31, 2013. Plans are required to be updated annually. A company that experiences a material event after a plan is submitted has 45 days to notify regulators of the event.
The interim final rule adopted by the FDIC affects covered insured depository institutions (“CIDIs”), insured depository institutions with $50 billion or more in total assets. These institutions will be resolved in accordance with the Federal Deposit Insurance Act. With the exception of three thrifts, holding companies for each CIDI are expected to file a living will as outlined above, as well as a resolution plan in accordance with the interim final rule. Currently 34 such BHCs exist. For those 34 BHCs, the interim final rule makes clear that two separate resolutions are contemplated: the resolution of the parent company via the U.S. Bankruptcy Code and the resolution of the insured depository institution in accordance with the Federal Deposit Insurance Act with the FDIC as receiver. The FDIC-promulgated interim final rule focuses on ensuring that depositors receive access to their insured deposits rapidly.
The interim final rule expects CIDI resolution plans to include a strategy for: the sale of core business lines; the continuation and funding of critical operational services; a strategy for separating the CIDI from its parent, along with a description of the parent’s and affiliates operations; a strategy for the CIDI’s sale or disposal; and a strategy for paying depositors. Additional resolution plan elements include a description of asset valuation methods, a list of major counterparties, and a description of the CIDI’s exposure to derivatives.
The interim final rule requires CIDIs whose parent company has $250 billion or more in total nonbank assets, to file their initial resolution plans by July 1, 2012. The second filing group, which consists of each CIDI whose parent company has $100-249 billion in total nonbank assets, must file their initial resolution plans on or before July 1, 2013. The third filing group, which consists of the remaining CIDIs, must file their initial resolution plans by December 31, 2013.
Comments on the interim final rule should be submitted within 60 days after publication in the Federal Register, which is expected during the week of September 19.