The Federal Reserve Board and Federal Deposit Insurance Corporation have finalized resolution plan guidance applying to the eight largest and most complex domestic banking organizations. The final guidance is applicable for the 2019 and subsequent resolution plan submissions by these organizations. The final guidance is not a regulation but represents supervisory expectations for how the firms’ resolution plans should address key vulnerabilities in resolution.
Shortcomings in resolution plans. Additionally, the agencies have jointly announced that the July 2018 resolution plans of four foreign-based banks contained weaknesses that did not rise to the level of "deficiencies." The agencies have sent feedback letters to each firm detailing the shortcomings and specific actions that can be taken to address them. The firms must address the shortcomings in their next resolution plans, which are due July 1, 2020, and are expected to implement certain resolution projects in the interim.
According to the Fed and the FDIC, Barclays Bank, Credit Suisse Group, Deutsche Bank, and UBS Group have "shortcomings" in their resolution plans, which are considered less severe weaknesses that require additional work in their next plan. The agencies cited issues involving weaknesses in how the firms communicate and coordinate between their U.S. operations and their foreign parents in stress. The agencies also identified a shortcoming with Credit Suisse related to estimating the liquidity needs of its U.S. intermediate holding company in a resolution.
According to the agencies, in the past decade, the four firms have improved their resolvability by significantly reducing the size and risk profiles of their U.S. operations and increasing their capital and liquidity levels. At the same time, the agencies noted, the resolvability of firms will change as both the firms and markets continue to evolve.
Guidance on resolution plans. Resolution plans are required to be submitted pursuant to Section 165(d) of the Dodd-Frank Act. The guidance is largely similar to the proposal issued in June 2018, providing additional information for the firms regarding their resolution planning capabilities in areas such as capital, liquidity, and payment, clearing, and settlement activities.
The proposed guidance described the agencies’ expectations in six substantive areas: capital, liquidity, governance mechanisms, operational, legal entity rationalization and separability, and derivatives and trading activities. After a review of the submitted 2017 resolution plans, the agencies identified four areas where more work may need to be done to improve the resolvability of the firms. The proposal updated the derivatives and trading activities, and payment, clearing, and settlement (PCS) activities areas of the 2016 Guidance based on the agencies’ review of the covered companies’ 2017 resolution plans. The PCS and the derivatives and trading activities sections of the final guidance contain several changes based on commenters’ suggestions, but retain the same principles as the proposed guidance.
The agencies received six comments on the proposed guidance, including from various financial services trade associations, a financial market utility, a foreign banking organization, and several individuals. Commenters supported the agencies’ efforts to consolidate existing resolution plan guidance. Several commenters urged the agencies to acknowledge that an effective single point of entry (SPOE) resolution strategy is a credible means of resolving a global systemically important bank in an orderly manner. Commenters also suggested that the resolution planning process be further streamlined by adopting a two-year cycle for resolution plan submissions and for submission of insured depository institution plans. Commenters also suggested that the agencies engage more proactively with non-U.S. regulators to improve efficiency of resolution planning and enhance information sharing.
Changes and modifications. The final guidance includes certain modifications and clarifications to the proposed guidance. The final guidance includes a new section regarding the format, assumptions, and structure of resolution plans, which includes the aspects of previous guidance that remain applicable to resolution planning. Because commenters found the agencies’ previously issued Frequently Asked Questions to be helpful, those FAQs that remain relevant have been appended to the final guidance. The agencies noted that, to the extent not incorporated in or appended to the final guidance, prior guidance is superseded.
The guidance does not prescribe specific resolution strategies for any firm, nor do the agencies identify a preferred strategy. This is despite commenters’ suggestions that the agencies acknowledge the SPOE strategy as a credible means of resolving a GSIB in an orderly manner. The final guidance also provides that the firms should develop and maintain capabilities to address situations where their selected strategy presents vulnerabilities.
The capital and liquidity sections of the final guidance remain largely unchanged from the proposed guidance and the previous guidance issued in 2016, including the expectations to model resolution capital and liquidity needs for each material entity and to hold and pre-position sufficient resources to meet those needs. The agencies state that they intend to provide additional information on resolution liquidity and internal loss absorbing capacity in the future, taking into consideration concerns raised in relation to the proposed rule by commenters.
Companies: Barclays Bank; Credit Suisse Group; Deutsche Bank; UBS Group
MainStory: TopStory BankingOperations BankHolding DoddFrankAct FederalReserveSystem FinancialStability Receiverships
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