Overview of Agency Feedback to Firms

The Federal Reserve Board (Board) and the Federal Deposit Insurance Corporation (FDIC) resolution plan rule describes an iterative process aimed at strengthening the resolution planning capabilities of each financial institution. As the process has progressed, the agencies have provided the firms with increasingly detailed guidance and feedback. Ultimately, it is the responsibility of the firms to integrate this guidance and feedback into their day-to-day risk-management decisions on a continual basis.

Recent Guidance and Feedback

The agencies provided detailed guidance to the firms in August 2014 and February 2015 for the development of their 2015 resolution plan submissions. These communications set out the specific issues that the firms were required to address in their July 2015 plans and provided additional guidance for the preparation of the plans. These communications contained general guidance for all firms as well as firm-specific feedback based on the individual structure and situation of each firm. The agencies required each firm to discuss specific actions in their July 2015 plans, which were then reviewed in the agencies' assessment frameworks:

• Loss absorbing capital and liquidity: Firms were required to include a description of the firm's methodology for estimating its likely capital and liquidity needs as well as a projection of total loss absorbing capacity and liquidity available to each material entity at the point of resolution and describe how they would address any shortfall between the two. Firms were also required to describe the mechanisms in place or under development to provide those capital and liquidity resources to the material entities where they are needed.
• Governance mechanisms: Firms were expected to identify governance mechanisms in place or in development that will ensure execution of the required board of directors' actions at the appropriate time, to include identification of pre-action triggers and existing agreements for such actions.
• Demonstrating operational capabilities for resolution preparedness, such as the ability to produce reliable information in a timely manner. Firms were required to demonstrate, on a material entity basis, that they could produce reliable information in a timely manner consistent with the expectations laid out in the Board's Supervision and Regulation Letter 14-1 guidance.⁸
• Ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process: Firms were required to include within their 2015 plans: (i) an actionable implementation plan to ensure the continuity of shared services that support critical operations in resolution, and (ii) an analysis of how these shared services would continue to be provided throughout the resolution process.
• Establishing a rational and less complex legal structure that would take into account the best alignment of legal entities and business lines to improve the firm's resolvability: Firms were directed to establish a set of criteria for a rational and less complex legal entity structure that would consider the best alignment of legal entities and business lines to improve resolvability. Each firm was required to evaluate its existing legal entity structure against the criteria and make adjustments as appropriate. The criteria should also have resulted in the identification of options to sell, transfer, or wind-down certain discrete operations during resolution that would be actionable under a variety of scenarios and market conditions, in a manner that does not disrupt the provision of needed services and should not be limited by the firm's preferred strategy.
• Developing a holding company structure that supports resolvability: Firms were directed to discuss how their current holding company structure supports resolvability or how they are preparing to move toward a top-tier holding company structure that supports resolvability.
• Amending, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings: Firms were directed to amend their contracts or adhere to the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol and amend their ISDA Master Agreements in accordance with protocol, and reflect those changes in their 2015 plans.

Improvements to the Public Sections of Resolution Plans

To further improve public understanding of the resolution plans, the agencies required each firm to improve the 2015 public section of its plan to include additional information describing the firm's strategy for resolving itself in a manner that mitigates systemic risk, a high-level explanation of how the firm would look following resolution, and a description of the steps that the firm was taking to improve its ability to be resolved in an orderly manner in bankruptcy. In addition, the agencies notified the firms that the public sections of their plans should include more detail on each material entity, including the type of business conducted, interconnectedness among the entities, and a general indication of the entities' capital and liquidity sources.

Prior Guidance and Feedback

The first resolution plans were filed in July 2012. Prior to this initial submission, FDIC and Federal Reserve System staff jointly identified critical operations for each firm and directed firms to identify their material entities.

The agencies identified a number of significant gaps in the initial resolution plans and subsequently issued guidance in April 2013.⁹ The guidance specifically required companies to address and mitigate five key obstacles to resolution:

• Multiple competing insolvencies
• Global cooperation
• Operations and interconnections
• Counterparty actions
• Liquidity and funding

The agencies received the second round of resolution plans in October 2013 and issued joint letters with feedback to each of the firms in August 2014.¹⁰ While the agencies noted improvements in the 2013 plans, they also identified specific shortcomings and told the firms that significant progress would be expected in their 2015 submissions. The agencies identified several common shortcomings in the firms' plans. These included assumptions that the agencies regarded as unrealistic or inadequately supported, such as the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators; and the failure to make, or in some cases even identify, the kinds of changes to their firm structure and practices that would be necessary to enhance the prospects for orderly resolution. Based on the review of the 2013 plans, the FDIC Board of Directors determined that the plans submitted by the eleven first-wave filers were not credible and would not facilitate an orderly resolution under the U.S. Bankruptcy Code.

In November 2014, the agencies jointly identified shortcomings, however, neither agency identified deficiencies with regard to Wells Fargo's 2014 plan. The shortcomings were required to be addressed in the firm's 2015 plan.¹¹

The agencies communicated that if the 2015 resolution plans submitted by the firms did not make demonstrable progress toward addressing the shortcomings and in taking the actions outlined in the letters, the agencies may use their authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to determine that a plan is not credible or would not facilitate orderly resolution in bankruptcy.

The agencies proactively increased their engagement with the firms following issuance of the August 2014 letters. In September, the agencies met with firms to discuss the letters and the review process for the 2015 submissions. The agencies made staff available at the firms' request to discuss issues in drafting their plans. There were also regular meetings between Federal Reserve System and FDIC staff to discuss issues and coordinate responses to the firms.

References

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