Summary:

The Federal Deposit Insurance Corporation (FDIC) has issued a final rule which substantively changes the scope and expectations for Insured Depository Institution (IDI) resolution plans (FDIC Final Resolution Rule). The Office of the Comptroller of the Currency (OCC) has published a notice of proposed rulemaking which includes substantive changes to the scope and expectations for recovery plans (OCC Proposed Recovery Rule).

The Result: Both the FDIC and the OCC are increasingly focusing on testing recovery and resolution capabilities to assess if the plans are feasible.

Who is Affected: All banks over $50 billion in assets.

In Depth:

Resolution and recovery plans are separate but related regulatory requirements focused on the preparedness of banks to weather events on the “stress continuum,” with substantive implications for the day-to-day operations of large banks.

The OCC’s recovery plans (OCC Recovery Plans) are intended to provide management with a set of triggers to quickly identify actual or potential severe stress events, and a playbook of actions to restore capital, liquidity, and operational stability to a bank entity, thereby preventing a potential failure of an entity, and the need for resolution. The OCC is proposing lowering the threshold for requiring OCC Recovery Plans be submitted, and expanding the requirements associated with such plans.

Currently, there are also two types of resolution plans:  1) IDI Plans, a type of resolution plan for which requirements are defined by the FDIC and were recently adjusted by the FDIC Final Resolution Rule, and 2) Dodd Frank 165(d) Plans, for which requirements are defined by the FDIC and Federal Reserve Board (FRB).

IDI Plans are intended to provide the FDIC with the playbook to resolve a failed institution in an orderly manner, while 165(d) Plans are intended to provide management and regulators with a playbook for the parent company to declare bankruptcy, and downstream capital and liquidity to material legal entities which can continue as going concerns until they are sold or wound down.

This post summarizes the OCC’s proposed changes to the recovery planning process, some of the key regulatory changes related to the FDIC’s IDI Plans, and implications for bank management.

Changes in Recovery and Resolution Planning Supervisory Guidance

The table below summarizes the requirements of the OCC Proposed Recovery Rule and the FDIC Final Resolution Rule, by bank size:

Proposed Changes to Recovery Planning Requirements

Per the OCC’s Proposed Recovery Rule, all banks subject to recovery planning requirements would be required to comply with a risk-based testing standard.

Under the proposed testing standard, a covered bank should test its recovery plan at least annually. The testing should include each element of the plan, including recovery triggers (e.g., the ability to produce data for the triggers in a timely basis), options for recovery (e.g., the ability to raise liquidity quickly, the ability to refresh a virtual data room for sales components), and the ability to produce impact assessments (e.g., the ability to calculate the impact of scenarios on material entities, critical operations, and core business lines for recovery options).

The OCC’s Proposed Recovery Rule emphasizes non-financial risks, including non-financial triggers, and coordination with other planning exercises, such as business continuity planning and resilience programs.

IDI Resolution Planning – Large Banks with over $100 billion in Assets (Group A)

The FDIC Final Resolution Rule newly defines banks with over $100 billion in total assets as “Group A” filers. Most Group A filers will be required to file IDI Plans on a triennial basis, except for IDIs associated with GSIBs, which will be required to file biannually. All Group A filers will all be required to submit an annual supplement which addresses important changes since the last filing.

Group A filers are required to submit resolution plans that comply with all of the content requirements of the FDIC Final Resolution Rule, including requirements for an “identified strategy” for the resolution of the covered insured depository institution (CIDI). The default “identified strategy” is establishment of a bridge bank and requires meaningful optionality for execution across a range of scenarios.

Critically, the final rule notes that each element of the resolution plan must be “credible,” and that in order to be deemed credible the full resolution submission needs to be supported with “observable and verifiable capabilities and data and reasonable projections.” The rule defines required capabilities for most components of the plan (e.g., reporting on deposit activities, continuity of critical services, separability of franchise components), and empowers the FDIC to conduct capabilities testing to inform their credibility assessment.

IDI Resolution Planning – Large Banks with $50 – $100 billion in Assets (Group B)

The FDIC Final Resolution Rule defines banks with $50-$100 billion in total assets as Group B CIDIs. Group B CIDIs are required to submit an informational filing containing information on resolution planning and readiness on a triennial basis, with interim supplements expected each year when an informational filing is not submitted.

Unlike Group A CIDIs, Group B CIDIs are not required to include an identified strategy for resolution. Group B CIDIs are expected to participate in capabilities testing similar to Group A firms, however the scope will be aligned to Group B informational filing requirements.

What Firms Should Do

Firms should conduct a thorough gap analysis against the requirements of the OCC’s Proposed Recovery Rule and the FDIC’s Final Resolution Rule and identify areas which may require staffing as well as data and technology investment.

Firms that are new to these requirements will need to stand up holistic recovery and resolution planning efforts to include the foundational elements of these disciplines (e.g., Board and senior management oversight/engagement; recovery and resolution trigger frameworks; data, systems and reporting capabilities; sufficient and skilled personnel allocated to these activities).

All firms should focus on their ability to execute the elements of their plans. We recommend formalized capabilities testing programs for both resolution and recovery planning capabilities that systematically reveal how the plans would work in practice and incorporate lessons learned from these exercises. These tests can take various formats – from full-scale simulations to tabletop exercises, to rapid refreshes of key components (e.g., updating liquidity and capital metrics) – and should include multiple lines of defense in the execution and evaluation of resolution and recovery planning capabilities testing programs. Engagement of senior management and the board in targeted exercises also reflects the enterprise-wide nature of an actual recovery or resolution and demonstrates the commitment of the firm to regulators. Although the occurrence of these types of deep stress events is rare, the planning and capabilities are most successful when they are incorporated into business-as-usual systems and processes.

Put Patomak’s Expertise to Work

As regulatory expectations continue to evolve to mitigate risks to financial stability, Patomak is ideally situated to advise firms on driving enhancements to recovery and resolution planning capabilities. Our deep expertise enables us to help you navigate complexities and mitigate risks. Wherever you are in your safety and soundness journey – from advance preparation to stay ahead of the curve, or verifying the adequacy of existing capabilities – Patomak’s suite of services can provide the support you need to succeed. If you would like to learn more about how Patomak can partner with you, please reach out to Diane Daley at ddaley@patomak.com, Mona Elliot at melliot@patomak.com, or Heather Espinosa at hespinosa@patomak.com.

 

[1] The OCC proposed rule is applicable to insured national banks, federal savings associations, and federal branches. Total assets are determined based on the average of total consolidated assets of the bank or the covered bank, as reported on the bank’s or the covered bank’s Consolidated Reports of Condition and Income for the four most recent consecutive quarters

[2] The FDIC Final Rule is applicable to Insured Depository Institutions.  Total Assets are determined based on the average of the institution’s four most recent Consolidated Reports of Condition and Income.