FDIC Adopts Proposed Rules for “Living Wills” and Credit Exposure Reports

By Steve Quinlivan on 03/29/2011

To promote financial stability, Section 165(d) of the Dodd-Frank Act requires each nonbank financial company supervised by the Federal Reserve Board, or Board, and each bank holding company with total consolidated assets of $50 billion or more to periodically submit to the Board, or FDIC, and the Financial Stability Oversight Council, or FSOC, a plan for such company’s rapid and orderly resolution in the event of material financial distress or failure, and a report on the nature and extent of credit exposures of such company to significant bank holding companies and significant nonbank financial companies and the nature and extent of credit exposures of significant bank holding companies and significant nonbank financial companies to such company. The proposed rule would implement the resolution plan and credit exposure reporting requirements set forth in section 165(d) of the Dodd-Frank Act.

Section 165(d) provides regulators with the ability to conduct advance resolution planning for a covered company. As demonstrated by the FDIC’s experience in failed bank resolutions, as well as the Board’s and the FDIC’s experience in the recent crisis, advance planning is critical for an efficient resolution of a company subject to the proposed rule. Advance planning has long been a component of resiliency and recovery planning by financial companies. The Dodd-Frank Act requires that certain financial companies incorporate resolution planning into their overall business planning processes. In preparing for an orderly liquidation under Title II of the Dodd-Frank Act of a financial company, the FDIC will have access to the information included in such company’s resolution plan. Advance knowledge of and access to this information will be a vital element in the FDIC’s resolution planning for such a company. The resolution plan will help regulators to better understand a firm’s business and how that entity may be resolved, and will also enhance the regulators’ understanding of foreign operations in an effort to develop a comprehensive and coordinated resolution strategy for a cross border firm.

Resolution Plan

The Dodd-Frank Act requires each company covered by the proposed rule to produce a resolution plan, or “living will,” that includes information regarding:

the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company;
full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company;
identification of the cross-guarantees tied to different securities;
identification of major counterparties;
a process for determining to whom the collateral of the company is pledged; and
any other information that the Board and the FDIC jointly require by rule or order.

The proposed rule would require a strategic analysis by the covered company of how it can be resolved under the US Bankruptcy Code in a way that would not pose systemic risk to the financial system. In doing so, the company must:

map its business lines to material legal entities and provide integrated analyses of its corporate structure;
credit and other exposures;
funding, capital and cash flows;
the domestic and foreign jurisdictions in which it operates;
supporting information systems for core business lines; and
critical operations.

The proposed rule specifies the minimum content of a resolution plan. The Board and the FDIC recognize that plans will vary by company and, in their evaluation of plans, will take into account variances among companies in their core business lines, critical operations, foreign operations, capital structure, risk, complexity, financial activities (including the financial activities of their subsidiaries), size and other relevant factors.

The board of directors of the covered company would be required to approve the initial and each annual resolution plan filed. A delegee of the board of directors of the covered company, rather than the board of directors of the covered company, may approve updates to a resolution plan.

After the initial resolution plan is submitted, each covered company would be required to submit a new resolution plan no later than 90 days after the end of each calendar year.

A covered company would be required to file an updated resolution plan within a time period specified by the Board and the FDIC, but no later than 45 days after any event, occurrence, change in conditions or circumstances or change which results in, or could reasonably be foreseen to have, a material effect on the resolution plan of the covered company. An update should describe the event, any material effects that the event may have on the resolution plan and any actions the covered company has taken or will take to address such material effects.

Material changes may include, but are not limited to, any of the following:

A significant acquisition, or series of such acquisitions, by the covered company;
A significant sale, other divestiture, or series of such transactions, by the covered company;
A discontinuation of the business of, or dissipation of the assets of the covered company, a material entity, core business line or critical operation;
The bankruptcy or insolvency of a material entity;
A material reorganization of the covered company;
The loss of a material servicing subsidiary or material servicing contract;
The unavailability or loss of a significant correspondent or counterparty relationship, source of funding or liquidity utilized by the covered company, a material entity, a core business line or critical operation;
The transfer or relocation of 5 percent or more of the total consolidated United States (domestic) assets of the covered company to a location(s) outside of the United States;
A reduction in the market capitalization or book value of the consolidated capital of 5 percent or more of the Covered Company as of the end of the previous calendar yearend; or
The transfer, termination, suspension or revocation of any material license or other regulatory authorization required to conduct a core business line or critical operation.

Credit Exposure Reports

Each credit exposure report is required to set forth the nature and extent of credit exposures of such company to significant bank holding companies and significant nonbank financial companies as well as the credit exposures of significant bank holding companies and significant nonbank financial companies to such company. The proposed rule specifies the credit exposures to be reported.

Credit exposure reports must be submitted to the Board and the FDIC no later than 30 days after the end of each calendar quarter.

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