2015 Resolution Plan Evaluation

Although each resolution plan is independently reviewed by the Federal Reserve Board (Board) and the Federal Deposit Insurance Corporation, the agencies closely coordinate to ensure consistency of treatment in the review process.

The agencies established independent and consistent processes for reviewing resolution plans and coordinated with each other throughout the review process. Both agencies established firm-specific (vertical) and issue-specific (horizontal) review teams to assess the plans and issues, as well as oversight teams to ensure consistent reviews across the plans within each agency. The factual findings and identified issues were further reconciled across both agencies, and joint letters were prepared. The agencies' processes have also been reviewed by the U.S. Government Accountability Office.⁴

The agencies' 2015 reviews focused on evaluating the preferred strategy presented by each firm. A successful resolution strategy must substantially mitigate severe adverse effects on financial stability. To demonstrate that a strategy meets this objective, assumptions must be reasonable and supported with detailed information, key obstacles to orderly resolution must be addressed, and the strategy must be executable across a range of failure scenarios and market conditions.

The agencies also evaluated the executability of the firms' resolution plans. In evaluating executability, the agencies assessed whether firms had established mechanisms to provide for key board actions, playbooks for executing their strategies, and management information systems with appropriate capabilities. The agencies also assessed whether the firms have sufficient and readily available capital and liquidity to recapitalize or support all entities needed to execute their plans, including adequate methodologies and supporting analysis. Further, the agencies reviewed the firms' progress in creating options for the sale and wind down of discrete businesses that could provide optionality and flexibility to help facilitate the execution of their plans.

The agencies also considered whether there was demonstrable progress to improve resolvability. This involved considering the specific actions firms had taken to improve resolvability, address previously identified shortcomings, and incorporate rule and guidance elements into the firm's corporate governance structure, ensuring that resolution planning has been made an ongoing institutional aim.

Areas Reviewed

In assessing the 2015 resolution plans, the agencies evaluated a number of areas, and key among them were seven elements:

1. Capital
2. Liquidity
3. Governance mechanisms
4. Operational capabilities
5. Legal entity rationalization
6. Derivatives and trading activities
7. Responsiveness

The importance of these issues is reflected in the updated guidance accompanying the April 2016 joint agency letters to the firms. Each element is described below.

1. Capital: Firms must be able to provide sufficient capital to material entities to ensure that they can continue to provide critical services as the firm is resolved. They must demonstrate that such support can be provided without disruption from creditors in bankruptcy so that critical operations can be maintained consistent with their strategy. The agencies assessed whether the firm had linked its processes for determining when to file for bankruptcy to its estimates of the resources needed to recapitalize its material entities. In assessing a firm's plan in this area, the agencies evaluated whether the firm had enough resources to recapitalize or support all entities needed to execute its plan under its strategy and scenario, including adequate methodologies and supporting analysis. The agencies also considered how the firm had positioned its capital resources to both provide flexibility and mitigate impediments to recapitalizing the subsidiaries.
2. Liquidity: Firms must be able to reliably estimate and meet their liquidity needs prior to, and in, resolution. In this regard, firms must be able to track and measure their liquidity sources and uses at all material entities under normal and stressed conditions. They must also conduct liquidity stress tests that appropriately capture the effect of stresses and impediments to the movement of funds. Holding liquidity in a manner that allows the firm to quickly respond to demands from stakeholders and counterparties, including regulatory authorities in other jurisdictions and financial market utilities, is critical to the execution of the plan. Maintaining sufficient and appropriately positioned liquidity also allows the subsidiaries to continue to operate while the firm is being resolved. In assessing the firms' plans with regard to liquidity, the agencies evaluated whether the companies were able to appropriately forecast the size and location of liquidity needed to execute their resolution plans and whether those forecasts were incorporated into the firms' day-to-day liquidity decisionmaking processes. The agencies also reviewed the current size and positioning of the firms' liquidity resources to assess their adequacy relative to the estimated liquidity needed in resolution under the firm's scenario and strategy. Further, the agencies evaluated whether the firms had linked their process for determining when to file for bankruptcy to the estimate of liquidity needed to execute their preferred resolution strategy.
3. Governance mechanisms: Firms must have an adequate governance structure with triggers capable of identifying the onset and escalation of financial stress events in sufficient time to allow them to prepare for resolution, and ensure the timely execution of their preferred resolution strategy. In assessing the firms' governance mechanisms, the agencies evaluated the firms' frameworks for boards of directors' and management oversight over resolution planning and their processes to identify stress, escalate information to board and senior management, and determine when to file for bankruptcy.

4. Operational capabilities: Firms must maintain significant operational capabilities and engage in regular contingency planning. Specifically, firms must:

   • Possess fully developed capabilities related to managing, identifying, and valuing the collateral that is received from, and posted to, external parties and its affiliates;
   • Have management information systems that readily produce key data on financial resources and positions on a legal entity basis, and that ensure data integrity and reliability;
   • Develop a clear set of actions to be taken to maintain payment, clearing and settlement activities; and
   • Have a fully actionable plan to ensure the continuity of all of the shared and outsourced services that their operations rely on, particularly those that support critical operations.
5. Legal entity rationalization: The agencies assessed whether firms had taken adequate steps to simplify or "rationalize" their legal entity structure to facilitate an orderly resolution. This would include the development of criteria to achieve and maintain a structure that facilitates orderly resolution and protects insured depository institutions. These criteria should be part of the firm's day-to-day decisionmaking process related to structure. In addition, the agencies evaluated whether the firms had developed actionable options to wind down, sell, or transfer discrete operations to facilitate the execution of their resolution plan under a range of failure scenarios and different market conditions.
6. Derivatives and trading activities: The trading activities of the major dealer firms can pose particular challenges to an orderly resolution. Some firms submitted a resolution strategy to maintain solvency and wind-down their U.S. and U.K. broker-dealers and associated trading activities, while other firms submitted a plan to shrink their trading activities. The agencies evaluated these strategies by focusing on the completeness and sufficiency of the supporting analyses, in the context of each firm's broader resolution plan and the impact of its plan on the broader financial system.
7. Responsiveness: The agencies expect the firms to take agency guidance into account in developing their future plans. The agencies assessed whether the companies complied with the prior feedback from the agencies in developing their resolution plans.

References

• Other Formats

• Full report (PDF)

• Stay Connected

• Twitter
• YouTube
• Flickr
• RSS Feeds
• Subscribe