The Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) (together the Agencies) adopted a joint regulation to implement the provision in section 165(d)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) requiring a large bank holding company or a large foreign banking organization (FBO) to adopt and file a resolution plan. Section 165(d)(1) requires each bank holding company with assets of $50 billion or more and each nonbank financial company designated by the Financial Stability Oversight Council (FSOC) for enhanced supervision by the FRB to report periodically to the FRB, the FDIC, and the FSOC the plan of such company for rapid and orderly resolution in the event of material financial distress or failure. This provision has been commonly referred to as the “living will” requirement. An FBO with limited U.S. nonbank assets will not be required to file a resolution plan until December 31, 2013.
I. Large Foreign Banks Required to File Resolution Plans
New Regulation QQ applies to any foreign bank or company that is, or is treated as, a bank holding company under section 8(a) of the International Banking Act of 1978, as amended, and that has $50 billion or more in total consolidated assets, as determined based on the average of the foreign bank’s or company’s four most recent quarterly Capital and Asset Reports for Foreign Banking Organizations as reported on FRB Form FR Y-7Q (or, if applicable, its most recent annual FR Y-7Q). Applicability of the rule to a foreign bank is based on world-wide consolidated assets, rather than only its U.S. assets.
The Dodd-Frank Act requires that, in applying the requirements of section 165(d) to any foreign nonbank financial company supervised by the FRB or any foreign-based company, the FRB give due regard to the principle of national treatment and equality of competitive opportunity, and take into account the extent to which the foreign-based financial company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States. 12 U.S.C. § 5365(b)(2).
II. Contents of a Resolution Plan
A resolution plan must generally include a strategic analysis of the plan for orderly resolution as well as information on corporate governance related to resolution planning, organizational structure, management information systems, interconnections and interdependencies among various subsidiaries and lines of business, supervision and regulation of the organization, and contact information. See section 243.4(b) of Regulation QQ for a detailed listing of the information requirements. An FBO will also be required to provide information regarding its U.S. subsidiaries, branches, and critical operations and core business lines, an explanation of how resolution planning for its U.S. operations is integrated into its overall contingency planning process, and information concerning the interconnections and interdependencies among its U.S.-based operations and its foreign-based operations.
The strategic analysis of an FBO should include detailed information as to how, in the event of material financial distress or failure of the FBO, a reorganization or liquidation of the subsidiaries and operations of the FBO that are domiciled in the United States could be accomplished under the U.S. Bankruptcy Code within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the FBO would have serious adverse effects on financial stability in the United States.
An FBO must identify funding, liquidity, support functions, and other resources, including capital resources, and map these items to its material entities, critical operations, and core business lines. The FBO must also discuss its strategy for maintaining and funding the material entities, critical operations, and core business lines in an environment of material financial distress and in the implementation and execution of its resolution plan and map these points to its material entities. The FBO’s strategic analysis must demonstrate how such resources would be utilized to facilitate an orderly resolution in an environment of material financial distress. The FBO must also provide its strategy in the event of a failure or discontinuation of a material entity, critical operation, or core business line and the actions that will be taken by the FBO to prevent or mitigate any adverse effects of such failure or discontinuation on the financial stability of the FBO and the United States.
An FBO is required to include in its resolution plan the information specified above with respect to the subsidiaries, branches and agencies, and critical operations and core business lines, as applicable, that are domiciled in the United States or conducted in whole or material part in the United States. The resolution plan of an FBO must also identify, describe in detail, and map to each legal entity the interconnections and interdependencies among the U.S. subsidiaries, branches and agencies, and critical operations and core business lines of the FBO and any foreign-based affiliate. In addition, an FBO must include a detailed explanation of how resolution planning for its subsidiaries, branches and agencies, and critical operations and core business lines that are domiciled in the United States or conducted in whole or material part in the United States is integrated into its overall resolution or other contingency planning process.
Regulation QQ designates a subsidiary that conducts core business lines or critical operations of an FBO as a “material entity.” When an FBO has a material entity and that material entity is subject to the Bankruptcy Code, then a resolution plan must assume the failure or discontinuation of the material entity and provide both the FBO’s and the material entity’s strategy, and the actions that will be taken by the FBO to prevent or mitigate any adverse effects of a failure or discontinuation of the entity on the financial stability of the United States.
III. Internal Approval Process
The involvement of a firm’s board of directors is critical to adequate resolution planning. As a general matter, a covered company’s board of directors is required to approve the initial resolution plan and each annual resolution plan. However, in the case of an FBO, a delegee of the board of the directors may approve the initial resolution plan and any updates to a resolution plan.
The description of an FBO’s corporate governance structure for resolution planning must include information regarding how resolution planning is integrated into its corporate governance structure and processes. An FBO must also identify the senior management official who is primarily responsible for overseeing the development, maintenance, implementation, and filing of the resolution plan and for its compliance with Regulation QQ. The FRB and the FDIC state that the requirements in the rule are minimums and the corporate governance structure is expected to vary based upon the size and complexity of the covered company. For the largest and most complex companies, it may be necessary to establish a central planning function that is headed by a senior management official. Such an official could report to the Chief Risk Officer or Chief Executive Officer and periodically report on resolution planning to the covered company’s board of directors.
IV. Tailored Plans
An FBO with relatively small nonbanking operations in the United States will be permitted to file a tailored report with reduced information requirements. Accordingly, the resolution plan of an FBO that has limited assets or operations in the United States would be significantly limited in its scope and complexity. Moreover, the nature and extent of the home country’s related crisis management and resolution planning requirements for the FBO also will be considered as part of the Agencies’ resolution plan review process.
The FRB and FDIC tailored the resolution plan requirement applicable to smaller, less complex FBOs in order to focus the content and analysis of such an organization’s resolution plan on the nonbanking operations of the organization, and the interconnections between the nonbanking operations and the insured depository institution operations of the covered company.
For an FBO with less than $100 billion in total nonbank assets that operates principally through banking offices, i.e., the assets of the U.S. bank operations, branches, and agencies comprise 85 percent or more of the FBO’s U.S. total consolidated assets, the resolution plan may focus on the nonbank operations. Specifically, an FBO meeting these criteria, and not otherwise excluded or directed by the FRB and the FDIC to submit a standard resolution plan, must identify and describe interconnections and interdependencies and provide the contact information with respect to the entire organization. Such a resolution plan must also include the remaining resolution plan elements, i.e., the strategic analysis, organizational structure, description of management information systems, and supervisory information, only with respect to the FBO’s nonbanking operations. The resolution plan must describe in detail, and map to legal entity the interconnections and interdependencies among the nonbanking operations as well as between the nonbanking operations and the banking operations of the FBO.
V. Filing Dates for Categories of Covered Companies
Covered firms will be required to file resolution plans in three groups with a staggered schedule. The first group comprises the largest, most complex covered companies, i.e., any covered company that has $250 billion or more in total nonbank assets (or, in the case of an FBO, $250 billion or more in total U.S. nonbank assets). Covered companies in this first group must submit their initial resolution plans no later than July 1, 2012.
The second group consists of covered companies with $100 billion or more in nonbank assets (or, in the case of an FBO, $100 billion or more in total U.S. nonbank assets). A firm in the second group of covered companies must submit its initial resolution plan no later than July 1, 2013. The third and final group consists of the remaining covered companies, i.e., covered companies with less than $100 billion in nonbank assets (or, in the case of an FBO, in total U.S. nonbank assets). A covered company in the third group is required to file its initial resolution plans on or before December 31, 2013. The above phase-in schedule generally applies to any company that is a covered company as of the effective date, November 30, 2011.
The annual filing provides a regular opportunity for a firm to update its resolution plan to reflect structural changes, acquisitions, and sales. The Agencies expect that firms will integrate resolution planning into their business operations. Accordingly, a covered firm is not required to update its resolution plan automatically upon the occurrence of a restructuring, acquisition, or sale. Instead, a firm is required to update its next annual resolution plan after the occurrence of a material event, such as a restructuring, acquisition, or sale, to reflect such an event. Regulation QQ also requires covered firms to file a simple notice with the FRB and the FDIC that such an event has occurred.
VI. Other Issues
Resolution plans are subject to review and approval by the Agencies. Regulation QQ specifies procedures that enable the agencies to impose restrictions on the operations of an covered company that has not filed an acceptable resolution plan. In addition, the rule also addresses issues related to advance consultations, confidential treatment of data and information included within a resolution plan, access to data, and enforcement.
76 Federal Register 67,323 (Nov. 1, 2011).
Material financial distress means a situation in which (i) an FBO has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; (ii) the assets of an FBO are, or are likely to be, less than its obligations to creditors and others; or (iii) an FBO is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.
11 U.S.C. § 1 et seq.
means a subsidiary or foreign office of the covered company that is significant to the activities of a
critical operation or core business line.
means those operations of the covered company, including associated services, functions and support, the failure or discontinuance of which, in the view of the covered company or as jointly directed by the FRB and the FDIC, would pose a threat to the financial stability of the United States.
Core business lines
means those business lines of the covered company, including associated operations, services, functions and support, that, in the view of the covered company, upon failure would result in a material loss of revenue, profit, or franchise value.
An FBO may limit its strategic analysis with respect to a material entity that is subject to an insolvency regime other than the Bankruptcy Code to a material entity that either has $50 billion or more in total assets or conducts a critical operation. Any such analysis should be in reference to that applicable regime.
Associate Sabina Vayner earns Pro Bono Service Award from Atlanta's Intellectual Property Inn of Court.
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