United States: What The Proposed Resolution Plan Rule Means For Smaller Banks

The FDIC's proposed bank resolution planning rule would make significant changes to its current rule and would cover more banks—including banks that have been subject to a moratorium on filing for the past five years. Other banks that would be covered may never have filed a resolution submission.

In this alert, we highlight the main features of the proposed resolution planning rule for smaller insured depository institutions that would be covered banks under the proposed rule—generally banks and savings associations with $50 billion and up to $100 billion in total assets (which we refer to as "banks" or "smaller banks").

Although the FDIC has explained that these banks would not be subject to full resolution plans but only "informational filings" and "key information" updates, the proposed rule would entail a significant compliance undertaking for these smaller banks due to substantial submission requirements that only nominally fall short of a full resolution plan in many respects, which we map out in detail as a compliance/reference tool.

Key Takeaways

• Unlike other recent proposals, banks with $50 billion in total assets would be covered, not just large banks with $100 billion or more in total assets. The FDIC estimates that there are currently 15 such banks, which would represent under 5 percent of the U.S. total banking industry assets. Any bank that crosses the $50 billion threshold would become subject to the proposed rule. 
• All covered banks would be subject to a two-year submission cycle rather than a three-year cycle. One year would require a full filing, and on off-cycle years, every covered bank would file a more limited, but still substantial, filing. Covered banks would also have to provide notice of material changes to the FDIC within 45 days.
• All covered banks would be required to work with the FDIC to assess and test their resolution capabilities, ensuring the continuation of critical banking services and the potential marketing of the franchise or components. 
• All covered banks would be required to demonstrate capabilities to promptly establish a virtual due diligence data room and populate it with information necessary for interested parties to submit well-informed bids on the bank or its assets.

Overview of the Resolution Submission Requirement

Two Filing Groups

The proposed rule would divide covered banks into two groups of filers. Group A would cover all banks with $100 billion or more in total assets. Group B would cover all banks with at least $50 billion but less than $100 billion in total assets.

Each Group A bank would be required to periodically submit a full resolution plan to the FDIC, which would entail meeting certain requirements that would not apply to Group B.

Each bank in Group B would be required to submit to the FDIC a so-called informational filing every two years, which would consist of much of the content required under the proposed rule for Group A. However, these informational filings for Group B would not include, among other things, a specific resolution strategy or a demonstration of the capabilities necessary to produce valuations that the FDIC could use to conduct a least-cost analysis at the time of failure.

This alert focuses primarily on the proposed compliance requirements for Group B banks.

Submission Schedule

Covered banks are currently required to submit resolution submissions annually. However, the FDIC has observed that the annual submission cycle does not allow the FDIC sufficient time to review banks' submissions thoroughly and develop meaningful feedback, or sufficient time for banks to incorporate that feedback into their subsequent submissions. Accordingly, the FDIC has proposed a two-year cycle. Banks in Group B would submit an informational filing every two years and an interim supplement on off-cycle years, intended to provide the FDIC critical up-to-date "key information."

The proposed rule would also retain, in modified form, the existing section of the current rule concerning the provision of information to the FDIC within 45 days in the event of a "material change" to the bank. The proposed rule would broaden what is considered a "material change" and would include a change in a bank's identified material entities, critical services, or franchise components or a change in its capabilities described in the most recent submission. It would also include a change to the covered bank's organizational structure, core business lines, size, or complexity, for example, by merger, acquisition, divestiture of assets, or a similar transaction that may have a significant impact on the bank's identified strategy.

Content Requirements for Resolution Submissions

The proposed rule would add detail or expand upon several of the content items that are required under the current rule or that have been specified in past feedback as guidance.

As noted above, while the informational filing is distinct from a full submission and the interim supplement is described as only including a portion of an informational filing, both would entail extensive filing requirements.

The entirety of the requirements for banks in Group B is detailed in the attachment to this alert as a compliance/review tool (available here). 

According to the FDIC's cost estimate in the proposed rule, smaller banks that are first-time filers are expected to face "relatively high initial compliance efforts.

Components of submissions would also need to be indexed. We read this requirement as indicative of the level of detail required for the submissions and their review or use.

Highlights

While Group A is subject to notable requirements that do not apply to Group B, a bank in Group B would still have to provide information for approximately 100 extremely detailed components in an informational filing.

Even in off-cycle years, banks in Group B would have to provide in interim supplements a substantial amount of information on a worldwide basis concerning the bank's:

• Structure. Structure and core business lines as well as their interconnectedness and financial information about them, including financial statements (audited, when available) for each material entity and regulated subsidiary 
  
  
• Deposits. Branch and U.S. and non-U.S. insured and commercial deposits, among other related information, and key depositors
  
  Note: This requirement would be independent of a bank's Part 370 (Recordkeeping for Timely Deposit Insurance Determination) requirements.
  
  
• Records and systems. Records and systems for the bank and key management information systems and applications
  
  
• Omnibus, sweep, pass-through accounts. Deposit sweep arrangements within the banking organization with outside third parties; identification of those contracts, as well as all omnibus, sweep, and pass-through accounts, identifying the accountholder, the location of relevant contracts, and the system on which they are maintained
  
  Note: This requirement will be of particular note for banks with significant fintech-bank partnerships. 
  
  
• Critical services and support. Critical services and critical services support, including their location worldwide and key personnel (by title, function, location, core business line, and employing entity)
  
  Note: This would appear to build on the interagency final guidance on third-party risk management.
  
  
• Payments. Each payment, clearing, and settlement system, including financial market utilities, of which the bank directly is a member or indirectly accesses that is a critical service or a critical service support 
  
  
• Separable and marketable franchise(s). Franchises of the bank that are currently separable and marketable in a timely manner in resolution, the size and significance of each franchise component, and the senior management officials at the bank who primarily oversee them
   
• Material asset portfolios. Each material asset portfolio by size and by category and classes of assets within such material asset portfolio; break down those assets that are held by a non-U.S. branch or regulated subsidiary 
  
  
• Material off-balance-sheet exposures. Material off-balance-sheet exposures (including the amount and nature of unfunded commitments, guarantees, and contractual obligations) of the bank, as well as an unconsolidated balance sheet for the bank and a consolidating schedule for all material entities that are subject to consolidation with the bank 
  
  
• Liabilities. Composition of the liabilities of the bank, including the types and amounts of short-term and longterm liabilities by type and term to maturity, secured and unsecured liabilities, and subordinated liabilities
  
  
• Parent and affiliates. Components of the parent company's and parent company affiliates' operations that contribute to the value, revenues, or operations of the bank that are based or located outside the United States, including regulated subsidiaries and non-U.S. branches and offices 
  
  Note: This requirement would be independent of any parent affiliate entity with the Federal Reserve.
  
  
• Impediments. Regulatory or other impediments to divestiture, transfer, or continuation of any non-U.S. branches, subsidiaries, and offices in resolution, including with respect to retention or termination of personnel

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.