Proposed Resolution Submission Requirements for Certain Insured Depository Institutions

The March 12 decision to invoke the FDIC’s emergency powers to facilitate the resolutions of Silicon Valley Bank and Signature Bank was an admission that, despite 15 years of costly reform efforts, we still do not have an effective framework for resolving failed banks. I agree that resolution planning submissions can move us closer to an effective resolution framework. However, I am not able to support this proposal in its current form because I have not been persuaded that the FDIC has the statutory authority to prescribe and enforce certain of its requirements.

Resolution planning requirements for banking organizations were not really a thing before the 2008 financial crisis. While the FDIC did propose resolution planning requirements on certain insured depository institutions in 2010,1 the Dodd-Frank Act was the first federal legislation to expressly authorize and require resolution planning. The Dodd-Frank Act requires certain bank holding companies and other nonbank financial companies to report periodically to the Federal Reserve Board, FSOC, and the FDIC their plans for rapid and orderly resolution under the Bankruptcy Code.2 Although probably it should have, the Dodd-Frank Act did not extend similar authorities to the FDIC to require insured depository institutions to submit resolution plans. Instead, as with its current resolution planning rule,3 the FDIC would rely on a grab bag of authorities that predate the Dodd-Frank Act.

As I read these authorities, the FDIC generally is on solid ground to the extent the proposal would require a covered insured depository institution (“CIDI”) to submit resolution-related analysis and other information to the FDIC. However, this proposal would go further by requiring CIDIs to demonstrate certain resolution-related capabilities.4 Similarly, the proposal would impose significant restrictions on a group A CIDI’s identified resolution strategy.5 These proposed requirements and restrictions go far beyond information requirements and could compel changes in the CIDIs’ businesses. Many of those changes might make good sense as a policy matter, but that is a question distinct from whether the FDIC has the authority to mandate those changes.

The apparent need for a legislative grant of authority is underscored by the conflict between the different enforcement schemes contemplated by this proposal and the Dodd-Frank Act.6 Notably, the FDIC’s current resolution planning rule does not lay out an explicit enforcement scheme. The proposal now would add a new paragraph (k) to “reiterate” its view on enforcement. Under that view, if the FDIC determines that a resolution plan is not credible—for example because it “is not supported with observable and verifiable capabilities”—the FDIC could impose asset growth restrictions or require divestitures, among other remedies.7

In contrast, the Dodd-Frank Act enforcement scheme is considerably more tailored. Under that approach, asset growth restrictions, required divestures, or other remedies can be ordered only after both the Federal Reserve Board and the FDIC have (i) determined that a company’s resolution is not credible or would not facilitate an orderly resolution under the Bankruptcy Code, (ii) offered an opportunity to cure, and (iii) then let two years pass under jointly imposed interim sanctions.8 If anywhere along the way one agency disagrees, there is no authority to impose further sanctions.

The Dodd-Frank Act’s joint and graduated enforcement process mitigates the potential for abuse of the consequential authority to impose asset growth restrictions, require divestitures, or otherwise shrink a “too-big-to-fail” firm. In contrast, if finalized as proposed, the FDIC could impose these or other sanctions in its sole discretion, without the approval of the Federal Reserve Board, and without having to work through the cure and interim sanction steps contemplated by the Dodd-Frank Act. The risk that the FDIC, should it have the authority to prescribe and enforce this proposal, could in effect nullify the Dodd-Frank Act’s enforcement scheme reinforces my view that the FDIC actually lacks that authority.

In closing, many of the new requirements and restrictions contemplated by this proposal are generally good policy. However, my current view is that this proposal would require a legislative grant of authority.9 I look forward to commenters’ views on this question, as well as on all other aspects of the proposal.

• 1

  See Special Reporting, Analysis, and Contingent Resolution Plans at Certain Large Insured Depository Institutions, 75 Fed. Reg. 27,464 (proposed May 17, 2010).

• 2

  12 U.S.C. § 5365(d).

• 3

  See Resolution Plans Required for Insured Depository Institutions With $50 Billion or More in Total Assets, 77 Fed. Reg. 3075, 3076 (April 1, 2012); Resolution Plans Required for Insured Depository Institutions With $50 Billion or More in Total Assets, 76 Fed. Reg. 58,379, 58,380–81 (Nov. 21, 2011) (interim final rule); Special Reporting, Analysis, and Contingent Resolution Plans at Certain Large Insured Depository Institutions, 75 Fed. Reg. at 27,464–65.

• 4

  For example, under proposed paragraph (d)(8), “[a] CIDI must be able to demonstrate capabilities necessary to ensure continuity of critical services in resolution.” Under proposed paragraph (d)(10), “[a] CIDI must be able to demonstrate the capabilities necessary to ensure that franchise components are separable and marketable in resolution.” Under proposed paragraph (d)(10)(viii), “[a] resolution submission must describe the CIDI’s current capabilities and processes to establish a virtual data room,” which probably should be interpreted as requiring a CIDI to have such capabilities, especially in light of the general capabilities requirement in paragraph (d)(10). Under proposed paragraph (d)(12), “[a] [group A] CIDI must be able to demonstrate the capabilities necessary to produce valuations needed in assessing the least-cost test.”

• 5

  For example, under proposed paragraph (d)(1)(iii), “[t]he identified strategy may not be based upon a sale or other disposition to one or more acquirers over resolution weekend.” Proposed paragraph (d)(1)(ii) would place onerous conditions on a group A CIDI’s identified strategy that does not use the formation and stabilization of a bridge depository institution, including that the group A CIDI determine and demonstrate that the alterative strategy “ best addresses the credibility criteria” (emphasis added). Related to this, under proposed paragraph (f)(1)(i), “[t]he FDIC may, at its sole discretion, determine that the resolution submission is not credible if . . . The identified strategy would not . . . address potential risk of adverse effects on U.S. economic conditions or financial stability.”

• 6

  While Title I plans are submitted by the holding company and address resolution under the Bankruptcy Code and this proposal contemplates submissions by the insured-depository-institution subsidiary and address resolution under the Federal Deposit Insurance Act, as a practical and arguably logical matter, there is significant overlap, even incorporation by reference, across the two submission types, and it is important that the Federal Reserve Board and the FDIC share a similar view on a banking organization’s resolution submissions under both regimes before moving toward enforcement. In particular, it would be a problem if the FDIC were of the view that an insured depository institution’s plan was not credible, while the Federal Reserve Board were of the view that the holding company’s plan was credible.

• 7

  Specifically, if the FDIC determines that a resolution plan is not credible, that would constitute a violation of a regulation that would subject the CIDI to the enforcement remedies available to the CIDI’s primary federal banking regulator. Where the FDIC is not the CIDI’s primary federal banking regulator, the FDIC states that it may utilize its backup enforcement authority against the offending CIDI. Whether enforcement is by the FDIC or the CIDI’s primary federal banking regulator, the available remedies could include, among others, asset growth restrictions and divestitures. See 12 U.S.C. § 1818(b)(6)(B), (C), & (F).

• 8

  12 U.S.C. § 5365(d)(4), (d)(5).

• 9

  While perhaps the proposal could be promulgated jointly by the banking agencies under their safety-and-soundness authorities and roles as primary Federal supervisor, the proposal would rely on FDIC-specific authorities and the FDIC's role as insurer or receiver.