‘Living Wills’: New Guidance From The Fed For Second Time Filers

‘Living Wills’: New Guidance From The Fed For Second Time Filers

Earlier this month, the Fed identified various shortcomings in the so-called resolution plans submitted by 11 large and very complex banking organizations.

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Resolution plans are documents that lay out the road map or “strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company.” These resolution plans have been dubbed “living wills” by the financial media, and specify the steps to be taken in a crisis, including raising funds and for an orderly wind down of the organization.

Fed: Earlier shortcomings in ‘living wills’

An initial lot of companies (referred as “first-wave filers” by the Fed) submitted living wills in 2012, and amended versions thereof in a second round in 2013. As mentioned above, 11 of these large filers had their resolution plans rejected by the Fed and the FDIC, the joint reviewers. The main points for issue were:

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(i) Assumptions that the agencies regard as unrealistic or inadequately supported, such as assumptions about the likely behavior of customers, counter-parties, investors, central clearing facilities, and regulators, and

(ii) The failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution.

The Fed’s opinion was categorical:

“Based on the review of the 2013 plans, the FDIC Board of Directors determined pursuant to section 165(d) of the Dodd-Frank Act that the plans submitted by the first-wave filers are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code. The Federal Reserve Board determined that the 11 banking organizations must take immediate action to improve their resolvability and reflect those improvements in their 2015 plans. The agencies agreed that in the event that the first-wave filers have not, on or before July 1, 2015, submitted plans responsive to the identified shortcomings, the agencies expect to use their authority under section 165(d) to determine that a resolution plan does not meet the requirements of the Dodd-Frank Act.” (Italics added for emphasis).

New guidance

On Friday, the Fed and the FDIC issued additional guidance for 117 U.S. bank holding companies with less than $100 billion in total non-bank assets and foreign-based firms with less than $100 billion in U.S. non-bank assets that are required to file ‘living wills’ in the second round filing by December 31, 2014.

The Fed has divided these companies in the categories of ‘more complex,’ ‘less complex,’ and ‘limited operations.’ The Fed requires compliance as follows.

The ‘Less complex’ entities may use the Fed’s optional tailored resolution template available here.

The tailored resolution plan focuses on the non-banking operations of the firm and on the interconnections and inter-dependencies between the non-banking and banking operations, clarifies the Fed.

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Saul Griffith is an investor in stocks, commodities and forex, writing under a pen name. Saul has top accounting qualifications and extensive experience in industry and the financial markets. He also has an abiding interest in breaking news that could be a harbinger of new trends and give insight into an instrument’s potential for providing value, growth or yield.
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