On October 3, 2011, the Financial Stability Board (the "FSB")1 announced that it had approved "the package of policy measures to be submitted to the G20's November summit to address the 'too big to fail' problems" posed by systemically important financial institutions ("SIFIs"). Among other things, the FSB package of policy measures will include:
Key attributes of effective resolution regimes for financial institutions, which will form a new international standard for the features all national regimes should have to enable failing financial institutions to be resolved safely and without exposing the taxpayer to the risk of loss A requirement that SIFIs, on an individual basis, that are determined to be globally important SIFIs ("G-SIFIs") have recovery and resolution plans, informed by resolvability assessments, and that home and host authorities develop institution-specific cooperation agreements and cross-border crisis management groups Additional loss absorbency requirements for those banks determined to be G-SIFIs, based on the methodology developed by the Basel Committee on Banking Supervision for assessing the global systemic importance of banks Measures to enhance the intensity and effectiveness of supervision, in particular of SIFIs, including improving the data systems for risk management at SIFIs and assessments of the adequacy of supervisory resources The enhancement of international standards for the robustness of core financial market infrastructures This package of policy measures provides further guidance on the Consultative Document on Effective Resolution of Systemically Important Financial Institutions (the "Consultative Document") issued by the FSB on July 19, 2011. The Consultative Document was designed to propose policy measures to improve the capacity of authorities to resolve SIFIs without systemic disruption and without exposing the taxpayer to the risk of loss. Long before the issuance of the Consultative Document and the October 3, 2011 recommendations of the FSB, the UK had already moved to require recovery and resolution plans2 to resolve UK SIFIs and the US had already moved to require resolution plans to resolve US SIFIs. In the UK and in the US, these plans are often referred to as "Living Wills."
Living Wills in the UK
The Banking Act 2009 created a Special Resolution Regime ("SRR") giving the Financial Services Authority (the "FSA"), the Bank of England and the UK Treasury various tools for resolving failed deposit-taking financial institutions. However, the UK authorities require detailed knowledge and understanding of a financial institution's business to exercise the SRR tools and enable the orderly resolution of a failed financial institution without relying on taxpayer support. Using powers given to it under the new Financial Services Act 2010, the FSA is currently consulting firms and interested parties on proposals for certain financial services firms to prepare and maintain Recovery and Resolution Plans ("RRPs") and, in addition, for firms holding client money and assets to develop client asset resolution plans ("CASS RP") to promote swift return of clients' money and custody assets ("CMA") should they fail. Some firms will have to prepare RRPs and CASS RRPs; smaller firms with CMA will only have to prepare CASS RRPs.
Due Dates for Living Wills in the UK
FSA will publish final rules in the first quarter of 2012. Certain rules will come into effect during the first quarter of 2012, but FSA will also provide transitional rules so firms will have until June 2012 to prepare their first RRPs.
Living Wills in the US
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act3 ("Dodd-Frank"). 12 U.S.C. 5365(d) (commonly referred to as "Section 165(d)") of Dodd-Frank requires US SIFIs to file Living Wills. To implement the requirements of Section 165(d), on September 13, 2011, the Federal Deposit Insurance Corporation (the "FDIC") issued a final rule4 (the "FDIC Final Rule"). In response to comments, the proposed rule5 regarding Living Wills required by Section 165(d) was substantially changed by the FDIC Final Rule.6 Similarly, on October 17, 2011, the Federal Reserve approved the FDIC Final Rule. Collectively, the Federal Reserve's final rule and the FDIC Final Rule are referred to as the FDIC Final Rule.
In addition, on September 13, 2011, the FDIC also approved an interim final rule7 (the "Interim Final Rule"), which was proposed by the FDIC on May 17, 2010, that requires covered insured depository institutions with US$50 billion in total assets ("CIDIs") to submit to the FDIC periodic contingency plans for their resolution in the event of a failure. The Interim Final Rule,8 which is effective January 1, 2012, is designed to complement the FDIC Final Rule. The FDIC Final Rule requires a Living Will to help resolve US bank holding companies under Title 119 of the US Code. The Interim Final Rule requires a Living Will to help the FDIC resolve a CIDI under the FDIA.10 The time frames for filing CIDI Living Wills with the FDIC are the same11 as the time frames for filing SIFI Living Wills and the intent of the FDIC is to have the filing of the CIDI resolution plan correspond to the filing of the SIFI resolution plan. Moreover, the CIDI resolution plan may incorporate data and other information directly from the SIFI resolution. The Interim Final Rule seeks comment on 17 wide ranging questions raised by the FDIC on the scope, definitions, strategic analysis, governance, informational elements and process of the Interim Final Rule. This means that the Interim Final Rule may change after the comment period is closed on November 21, 2011 and the FDIC takes the comments into account.
Due Dates for Living Wills in the US
Rather than require all US SIFIs to submit Living Wills at the same time, as was originally proposed by the FDIC and the Federal Reserve, the FDIC Final Rule requires a staggered process primarily based upon the amount of nonbank assets held by the US SIFI. US SIFIs will now be placed in one of three groups commencing with the SIFIs with the most nonbank assets. The rationale for the three groups is to allow the regulatory agencies to focus first on the largest and most complex US SIFIs and to gain experience that may be used in assessing the Living Wills of the other two groups. The Federal Reserve and the FDIC have indicated publicly that Group I Living Wills will allow them to gain knowledge that they will use to help evaluate Group II and Group III Living Wills. It is likely that the FDIC and the Federal Reserve consulted with the UK supervisory agencies because the Living Wills filing dates for UK SIFIs and US SIFIs are very close in time.12
Group I,13 whose Living Wills are due on July 1, 2012, includes US bank holding companies (and foreign banking organizations ("FBOs"), limited to the US nonbank assets) with at least US$50 billion in consolidated assets which also have US$250 billion or more in nonbank assets, and any organization designated as a SIFI by the Financial Stability Oversight Council (the "FSOC"). Some of the financial institutions in Group I include Bank of America Corporation, JPMorgan Chase & Co., Citigroup Inc., The Goldman Sachs Group, Inc. and Morgan Stanley. Group II,14 whose Living Wills are due on or before July 1, 2013, includes US bank holding companies (and FBOs, limited to US nonbank assets) with at least US$50 billion in consolidated assets which are not included in Group I and also have US$100 billion or more in nonbank assets, and any organization designated as a SIFI by the FSOC. Group III,15 whose Living Wills are due on or before December 31, 2013, includes all US SIFIs not in Group I or Group II with less than US$100 billion in nonbank assets. Most US SIFIs that are US branches and agencies of international banks are likely to be in Group III because the initial focus of the Federal Reserve and the FDIC is on US nonbank assets rather than either US bank assets or global nonbank assets. A US SIFI with less than US$100 billion in nonbank assets and total insured depository institution assets that comprise at least 85% of the US SIFI's total consolidated assets may file a tailored plan16 that focuses on nonbank operations. A company that becomes a SIFI after the effective date of the FDIC Final Rule must submit its Living Will by the July 1, 2012 following the date on which the company becomes a SIFI if that date is at least 270 days after the date on which the company becomes a SIFI.17
The FSOC has not yet designated any SIFI. However, on October 11, 2011, the FSOC issued a second notice of proposed rulemaking and interpretive guidance with a request for public comment18 (the "FSOC Proposed Rule"). The FSOC Proposed Rule clarifies the process the FSOC will use to designate nonbank financial companies19 as SIFIs. Under Section 11320 of Dodd-Frank, the FSOC designation means these SIFIs will be subject to prudential standards (e.g., enhanced supervision and regulatory standards) and supervision by the Federal Reserve. Due to the size of these SIFIs, the Federal Reserve is likely to have a core staff of examiners located onsite at the SIFI's main office, and those examiners will effectively conduct inspections and examinations of areas of the SIFI on each business day. It is possible that the FDIC will also have onsite examiners at the location. Federal Reserve examiners will require substantial recordkeeping, report filing, policy development, staffing and systems upgrades. The Federal Reserve is also likely to require enhanced internal controls, expanded compliance structures, more focused risk management and a wider scope of audits. Since the examiners will be onsite, these SIFIs will likely receive a consistent dose of corrective action letters and examinations that are much tougher than any audit undertaken at the SIFI prior to the SIFI designation. All...