FDIC and Federal Reserve Issue Joint Notice of Proposed Rulemaking under the Dodd-Frank Act: Resolution Plans and Credit Exposure Reports

April 6, 2011

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On March 29, 2011, the Federal Deposit Insurance Corporation (the "FDIC") and the Board of Governors of the Federal Reserve System (the "Fed") jointly released a notice of proposed rulemaking ("NPR") proposing rules relating to the resolution plan (also known as the "living will") and credit exposure report requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "DFA").  Both the resolution plan and credit exposure report requirements apply to nonbank financial companies ("NBFCs") designated by the Financial Stability Oversight Council (the "Council" or "FSOC") for Fed supervision and bank holding companies ("BHCs") (including any foreign bank or company that is treated as a bank holding company under U.S. law) with $50 billion or greater in consolidated assets (together with the Fed-supervised NBFCs, the "Covered Companies").

The text of the March 29, 2011 NPR (the "March 29 NPR") is available at http://www.fdic.gov/news/board/29Marchno4.pdf.

For a more detailed discussion of the joint NPR, international recovery and resolution plan efforts, how the regulatory approach to resolution planning has evolved, and practical considerations toward execution, see Gibson Dunn’s Detailed Memorandum.

I.  Resolution Plan and Credit Exposure Report Requirements Broadly Laid out under Dodd-Frank

The DFA, enacted July 21, 2010, requires certain systemically important institutions to periodically file:

  • a "plan for such company for rapid and orderly resolution in the event of material financial distress or failure"; and
  • a "report concerning the nature and extent to which the company has credit exposure to other significant nonbank financial companies and significant bank holding companies and the nature and extent to which other significant nonbank financial companies and significant bank holding companies have credit exposure to the company."[1] 

The DFA requires that both the resolution plan and credit exposure report be filed with the Fed, the FDIC, and the Council.[2]

The DFA broadly outlines the required content of resolution plans and credit exposure reports, but delegates to the FDIC and Fed joint authority to further specify these requirements and to require additional information. 

II.  Entities Subject to Resolution Plan and Credit Exposure Report Requirements

The DFA provides that enhanced Fed supervision under Title I of the DFA (including the resolution plan and credit exposure report requirements) applies to two types of systemically important financial institutions:

  • NBFCs designated by the Council to be supervised by the Fed; and
  • BHCs with total consolidated assets equal to or greater than $50 billion.[3]  

The March 29 NPR provides more detailed criteria for determining which companies are subject to the resolution plan and credit exposure report requirements.  The proposed rule defines the term "Covered Companies" to include:

  • Any BHC with $50 billion or more in total consolidated assets, as determined based on the average of the company’s four most recent Consolidated Financial Statements for Bank Holding Companies as reported on the Federal Reserve’s FR Y-9C;
  • Any foreign bank or company that is treated as a BHC under section 8(a) of the International Banking Act of 1978 and that had $50 billion or more in total consolidated assets, as determined based on the foreign bank’s or company’s most recent annual or, as applicable, the average of the four most recent quarterly Capital and Asset Reports for Foreign Banking Organizations as reported on the Federal Reserve’s Form FR Y-7Q; or
  • Any NBFC that the Council has determined under DFA § 113 must be supervised by the Board[4] and for which such determination is in effect.[5]

A.   Domestic and Foreign Entities Subject to Different Requirements

1.   Domestic Covered Companies

The NPR provides that "A Covered Company that is domiciled in the United States would be required to provide information with regard to both its U.S. operations and its foreign operations."[6]  For a Covered Company with foreign operations, then, the proposal states that "the plan should identify the extent of the risks related to its foreign operations and the Covered Company’s strategy for addressing such risks."[7]  The March 29 NPR further proposes that resolution plans "should take into consideration, and address through practical responses, the complications created by differing national laws, regulations and policies," and map core business lines and critical operations to legal entities operating in, or connected to, foreign jurisdictions.[8]

2.  Foreign-based Covered Companies

While a Covered Company domiciled in the United States is required to provide information relating to all of its global (U.S. and foreign) operations, the proposed rule states that a foreign-based Covered Company need only provide:

  • Information regarding its U.S. operations;
  • An explanation of how resolution planning for its U.S. operations is integrated into the foreign-based Covered Company’s overall contingency planning process; and
  • Information regarding the interconnections and interdependencies among its U.S.-based and foreign operations.[9] 

Similarly, in regard to credit exposure reports, a foreign-based company "would be required to include only information with respect to its subsidiaries and operations that are domiciled in the United States."[10] 

III.  Timing for the Submission of Resolution Plans and Credit Exposure Reports

The March 29 NPR addresses both the deadline by which initial resolution plans must be filed and the frequency with which resolution plans and credit exposure reports must be submitted going forward. 

A.  Resolution Plans

1.   Initial and Annual Plans

The March 29 NPR would require a Covered Company to submit its initial resolution plan "within 180 days of the effective date of the final rule, or within 180 days of such later date as the company becomes a Covered Company."[11]  Following the filing of their initial resolution plans, Covered Companies would be required to submit updated resolution plans within 90 days after the end of each calendar year. 

The comment period for the March 29 NPR is set to run for 60 days from the date of the proposal’s publication in the Federal Register.  In theory, then, the initial submission date for Covered Companies could be as early as year-end 2011, 240 days following the date the proposed rules are published.  However, this timeline would require the Fed and FDIC to issue final rules less than a month after the close of the comment period.

2.  Updated Plans

In addition, Covered Companies would be required to file updated resolution plans "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."[12]  The NPR provides that plans updated due to a material event must be filed within 45 days following the event, but would grant the Fed and FDIC discretion to waive the filing requirement or grant additional time.

The NPR provides a non-exclusive list of "material" changes that would trigger the requirement to re-file a resolution plan, including:

  • 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;
  • The bankruptcy or insolvency of a material entity;
  • 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; and
  • 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.[13]

B.  Credit Exposure Reports

The NPR also sets forth the frequency with which Covered Companies must submit credit exposure reports.  While the DFA merely states that such reports are to be filed "periodically", the proposed rule states that Covered Companies must submit credit exposure reports on a quarterly basis.  Specifically, credit exposure reports must be submitted "[n]o later than 30 days after the end of each calendar quarter."[14]

IV.  Minimum Information in Resolution Plans

As discussed in greater detail in the sections that follow, the March 29 NPR would require that each resolution plan contain:

  • An executive summary;
  • A strategic analysis of the resolution plan’s components;
  • A description of the company’s corporate governance structure for resolution planning;
  • Information regarding the company’s overall organization structure and related information;
  • Information regarding the company’s management information systems;
  • A description of interconnections and interdependencies among the company and its material entities; and
  • Supervisory and regulatory information.[15]

A.   Strategic Analysis of the Resolution Plan’s Components

The March 29 NPR provides that the Strategic Analysis section should describe the company’s "critical thinking detailing how, in practice, it could be resolved under the Bankruptcy Code."[16]  The plan’s Strategic Analysis must provide detailed information as to how, in the event of material financial distress or failure of the company, a reorganization or liquidation of the company could be accomplished within a reasonable period of time and in a way that "substantially mitigates" the risk that the failure of the company would have serious adverse effects on financial stability in the United States.[17]

Specifically, the Strategic Analysis must describe the core elements of a company’s resolution plan, including:

  • The analytical support for the resolution plan as a whole, along with key assumptions underlying the plan;
  • The range of specific actions to be taken by the company to facilitate a rapid and orderly resolution of the company, its material entities, critical operations and core business lines in the event of material financial distress or failure of the company;
  • The company’s strategy for maintaining operations of, and funding for, the company and its material entities, and a mapping of the strategy and funding to the company’s critical operations and core business lines; and
  • A strategy for ensuring that any of the company’s insured depository institution subsidiaries will be adequately protected from risks arising from the activities of any nonbank subsidiaries of the company.[18]

The Strategic Analysis must also address the timelines and potential impediments related to the plan’s execution.   

B.  Organizational Structure and Related Information

The proposed rule would require detailed information regarding the company’s structure and financial positions, including:

  • A hierarchical list of all material legal entities, including jurisdictional and ownership information, and a mapping of the company’s core business lines and critical operations to these material entities and others;
  • Information regarding material assets, liabilities, derivatives, hedges, capital and funding sources (including off-balance sheet exposures), as well as a mapping of this information to material entities, critical operations, and core business lines, along with location information;
  • Identification of major counterparties and a description of the interconnections, interdependencies, and relationships with such parties; and
  • An identification of trading, payment, clearing and settlement systems utilized by the company, and a mapping of these memberships to material entities, critical operations, and core business lines.[19]

C.   Interconnections and Interdependencies between the Company and Its Material Entities

Additionally, a Covered Company must describe the interconnections and interdependencies of the company with its "material entities and affiliates, and among the critical operations and core business lines of the Covered Company that, if disrupted, would materially affect the funding or operations of the Covered Company, its material entities, or its critical operations or core business lines."[20]

These interconnections may include:

  • Common or shared personnel, facilities, or systems;
  • Capital, funding, or liquidity arrangements;
  • Credit exposures;
  • Cross-guarantee arrangements, cross-collateral arrangements, cross-default provisions, and cross-affiliate netting agreements;
  • Risk transfers; and
  • Service level agreements.[21]

V.  Iterative Review Process under the Proposed Rule

The resolution planning process will require a close collaboration and exchange of information with banking regulators.  The DFA provides that the Fed and FDIC are to review resolution plans, give notice of deficiencies to companies lacking a credible plan, and impose stringent requirements and, possibly, divestiture, on such deficient companies.[22]

The March 29 NPR confirms the iterative nature of the resolution planning process, proposing a multi-step process for the submission and agency review of resolution plans.  Under the proposed rule, the following process would apply to the submission and approval of plans:

1)  The Covered Company submits its plan.

2)  The Fed and FDIC review the plan "to determine whether it appears to contain the elements set forth in the proposed rule and to be informationally complete."[23]  The agencies have 60 calendar days to make this initial determination. 

a.  If the Fed and FDIC determine that the plan is deficient, the company has 30 days to resubmit a complete plan, after receipt of a written notice of deficiency.

3)  After accepting a plan as complete for further review, the Fed and FDIC review the plan to determine jointly whether it is in "compliance with the requirements of the proposed rule."

a.  If the Fed and FDIC determine that the plan is "not credible or would not facilitate an orderly resolution"[24] of the company, they must notify the company in writing, identify the deficiencies and request resubmission.

b.  The company then has 90 days to resubmit a revised plan.  The resubmitted plan must detail revisions made to address the deficiencies identified by the Fed and FDIC.  It must also describe "[a]ny changes to the Covered Company’s business operations and corporate structure that the Covered Company proposes to undertake to facilitate implementation of the revised Resolution Plan."[25]  Finally, a resubmitted plan must include a statement as to why the company believes the revised plan is credible and would result in an orderly liquidation of the company under the Bankruptcy Code.

4)  Upon resubmission, the agencies then re-review the resolution plan.  The NPR does not provide details of next steps, but presumably:

a.  If a plan is jointly determined by the agencies to be acceptable, the review process ends.

b.  If a plan is jointly determined by the agencies to be deficient, the resubmission process is repeated.

VI.  Enforcement Authority under the Proposed Rule

The March 29 NPR calls for the imposition of the following sanctions in the event a company fails to timely resubmit an acceptable and credible revised plan:

1)  The Fed and FDIC would have the authority to jointly impose more stringent capital, leverage or liquidity requirements, or restrictions on the growth, activities or operations of a company that fails to resubmit a rejected plan or submits a plan that the Fed and FDIC determine continues to be deficient.[26]

2)  If a company fails to submit a workable plan within two years of the above-described sanctions, the Fed and FDIC, in consultation with the Council, would have the authority to jointly direct the company to divest assets or operations as needed to facilitate an orderly resolution of the company under the Bankruptcy Code in the event the company were to fail.[27]

Presumably these mechanisms would also apply if a company failed to submit an initial plan, but the proposed rule does not make this clear.

VII.  Minimum Information Required in Credit Exposure Reports

While the DFA does not set out the detailed contents of a credit exposure report, the March 29 NPR provides a long list of credit exposures that a Company must include in a credit exposure report.  This extensive list includes:

  • The aggregate credit exposure associated with all extensions of credit, including loans, leases, and funded lines of credit; aggregate exposure associated with all committed but undrawn lines of credit; and aggregate exposure associated with all deposits and money placements, all as between:
    • The Covered Company and its subsidiaries to each significant company[28] and its subsidiaries; and
    • Each significant company and its subsidiaries to the Covered Company and its subsidiaries.
  • The aggregate credit exposure associated with all counterparty credit exposure (on both a gross and net basis) in connection with a derivative transaction between the Covered Company and its subsidiaries and each significant company and its subsidiaries.[29]

VIII.  Additional Analysis

For a more detailed discussion of the joint NPR, international recovery and resolution plan efforts, how the regulatory approach to resolution planning has evolved, and practical considerations toward execution, see Gibson Dunn’s Detailed Memorandum.


  [1]   DFA § 165(d).

  [2]   DFA § 165(d)(1) and (2).

  [3]   DFA § 165(d)(1).  Additionally, DFA § 113 contains an "anti-evasion" provision through which the Council may subject the financial activities of companies that are not NBFCs to prudential Fed supervision (with the financial activities going into an intermediate holding company).  One question that should be resolved during the rulemaking process is whether this anti-evasion provision could be used to subject companies that are not technically nonbank financial companies to the resolution planning and credit exposure reporting requirements of the DFA.

  [4]   See our previous alert, Financial Stability Council Releases Proposed Framework to Designate Financial Companies as Systemically Significant Under the Dodd-Frank Act, Jan. 20, 2011, for a discussion of Council rulemaking to establish criteria for designating NBFCs for Fed supervision. 

  [5]   Resolution Plans and Credit Exposure Reports Required, Notice of Proposed Rulemaking at 5-6 (Mar. 29, 2011, as yet unpublished in the Federal Register), available at http://www.fdic.gov/news/board/29Marchno4.pdf  (hereinafter cited as "March 29 NPR").

  [6]   March 29 NPR at 11.

  [7]   March 29 NPR at 14.

  [8]   March 29 NPR at 14-15. 

  [9]   March 29 NPR at 11.

[10]   March 29 NPR at 16-17.

[11]   March 29 NPR at 8.

[12]   March 29 NPR at 9.

[13]   March 29 NPR at 9-10.

[14]   March 29 NPR at 47.

[15]   March 29 NPR at 11.

[16]   March 29 NPR at 11-12.

[17]   March 29 NPR at 12.

[18]   March 29 NPR at 11-13, 40-41.

[19]   March 29 NPR at 14-15, 42-44.

[20]   March 29 NPR at 15.

[21]   March 29 NPR at 46.

[22]   DFA § 165(d)(3)-(5).

[23]   March 29 NPR at 17.

[24]   March 29 NPR at 52.

[25]   March 29 NPR at 52.

[26]   March 29 NPR at 19.

[27]   March 29 NPR at 19.

[28]   The March 29 NPR does not define what "significant bank holding companies" or "significant nonbank financial companies" would qualify as a "significant company" counterparty for the purposes of credit exposure reports.  However, the Fed issued a separate NPR on February 8, 2011, published in the Federal Register on February 11, 2011, proposing to define these terms.  See Definitions of ”Predominantly Engaged in Financial Activities” and ”Significant” Nonbank Financial Company and Bank Holding Company, 76 Fed. Reg. 7731 (proposed Feb. 8, 2011), available at http://edocket.access.gpo.gov/2011/pdf/2011-2978.pdf.

[29]   March 29 NPR at 48-50.

Gibson, Dunn & Crutcher LLP 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact Kimble Cannon (310-229-7084, kcannon@gibsondunn.com) in the firm’s Los Angeles office, Michael Rosenthal (212-351-3969, mrosenthal@gibsondunn.com) in the firm’s New York office, Chuck Muckenfuss (202-955-8514, cmuckenfuss@gibsondunn.com) or Chris Bellini (202-887-3693, cbellini@gibsondunn.com) in the firm’s Washington, D.C. office, the Gibson Dunn lawyer with whom you work, or any member of the firm’s Financial Institutions Practice Group.

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