Resolution Plan Assessment Framework and Firm Determinations (2016)
PrintBackground on Resolution Planning
During the recent financial crisis, large financial institutions were unprepared to be resolved under the U.S. Bankruptcy Code. As demonstrated by Lehman Brothers, firms had not been required, nor seen the need, to take specific actions to prepare themselves for resolution under bankruptcy. This lack of preparedness contributed to the disruption that the failure of Lehman ultimately generated. Under these conditions, there were limited options for managing the failure of one of these firms--either allow an unprepared firm to go through bankruptcy or provide government support for that firm.
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) complements ongoing initiatives implemented by the federal banking agencies to increase the resiliency of large financial institutions, including significant increases to their capital and liquidity levels, by requiring the largest bank holding companies 1 and nonbank financial companies designated by the Financial Stability Oversight Council, to prepare resolution plans, also known as living wills, for their rapid and orderly resolution in the event of material financial distress. This process is designed to foster resolution planning and enables agencies to assess whether a firm could be resolved under bankruptcy without severe adverse consequences for the financial system or the U.S. economy.
Each firm subject to the resolution plan process must submit its plan for rapid and orderly resolution under bankruptcy in the event of its material financial distress or failure. These plans are reviewed by the Federal Reserve Board (Board) and the Federal Deposit Insurance Corporation (FDIC). Following their review, the Board and the FDIC may jointly determine that a plan is not credible or would not facilitate an orderly resolution of the company under the U.S. Bankruptcy Code ("joint determination"). If there is a joint determination, the agencies must notify the firm of the deficiencies in the plan jointly identified by the agencies. Firms must remedy their jointly identified deficiencies by October 1, 2016.
If both agencies agree that a firm has not adequately remediated the deficiencies, the agencies, acting jointly, may impose more stringent prudential requirements on the firm until it remediates them. The prudential requirements may include more stringent capital, leverage, or liquidity requirements, as well as restrictions on growth, activities, or operations of the firm, or any subsidiary thereof. If, following a two-year period beginning on the date of the imposition of such requirements, a firm still has failed to adequately remediate that deficiency, the agencies, in consultation with the Financial Stability Oversight Council, may jointly require the firm to divest certain assets or operations.
A plan is deemed to continue to have joint deficiencies unless one or both agencies determine that the firm has remediated the deficiencies.
Plans may have other weaknesses that are identified by both agencies but are not considered deficiencies; these weaknesses are referred to as shortcomings. Shortcomings must be remediated by the next full submission of firms' resolution plans on July 1, 2017.
References
1. The term bank holding companies as used herein includes foreign banks or companies that are bank holding companies or are treated as bank holding companies for U.S. regulatory purposes with $50 billion or more in total consolidated assets. Return to text
