Magazine article American Banker

Tougher Reviews, Disclosure Debate Highlight New Phase of Living Wills

Magazine article American Banker

Tougher Reviews, Disclosure Debate Highlight New Phase of Living Wills

Article excerpt

Byline: Joe Adler

WASHINGTON -- The first two years of a requirement for large firms to draft "living wills" almost felt like a dress rehearsal, but that appears likely to change in 2014.

The New Year promises more rigorous grading of banking companies' updated resolution plans than how regulators treated their first submissions, the inaugural filings of three nonbanks firms recently designated as "systemically important," and continued debate over how much of the wind-down plans should be public.

"They didn't get a tremendous amount of feedback in the first go around," said John Corston, a director at Deloitte and a former associate director in the Federal Deposit Insurance Corp.'s complex financial institutions section. "There is an expectation that there will be more meaningful feedback by the agencies to the institutions."

The FDIC and Federal Reserve Board are currently reviewing the second drafts for 11 of the largest firms, which were the first to submit initial plans in 2012. The reviews aim to assess how easily a firm could be unwound in bankruptcy. That is in contrast to the first drafts, which were largely graded for completeness. Under the Dodd-Frank Act, the two agencies can take actions against companies if their plans are considered subpar.

"Unlike the first round, this round of plans will be subject to evaluation under the standards of the statute, which is resolvability under bankruptcy. I view that ... as an important work in progress and in some sense the first real test of this process," FDIC Chairman Martin Gruenberg said last month at a meeting of experts who advise the agency on its resolution procedures.

Resolution planning is now a reality for about 130 firms, from big names like JPMorgan Chase (JPM) and Bank of America (BAC) to more obscure foreign banks with limited U.S. activities. The aim of the living will process is twofold: compel institutions to think about steps to simplify their structure, and help provide a roadmap to the FDIC in the event the agency ever has to exercise its new resolution powers to clean up a failed behemoth.

All firms have submitted first drafts under a staggered deadline schedule, but those initial plans were essentially just to get companies familiar with the process. But with all filers required to write annual updates, the attention has now shifted back to the most complex companies that had submitted first drafts in July 2012.

Those 11 filers -- including JPMorgan Chase, B of A and Citigroup (NYSE: C) -- are now awaiting a response from the regulators to their second submissions that were delivered in October, and are also in the process of writing third drafts due in July.

Meanwhile, the four firms in the middle -- including Wells Fargo, which is considered less complex than the top-tier filers despite its size -- must submit their second drafts in July. The agencies just Friday posted public portions of the first living wills that the roughly 115 firms in the last tier had submitted at the end of December; they will file updates by the end of 2014.

The agencies are expected to begin assessing the initial second-round plans more critically to gauge whether institutions' scenarios for how they could be unwound is credible. The Fed and FDIC issued guidance in April for the second filings, requiring, for example, that firms state in detail how they would remediate obstacles to an orderly resolution. According to an FDIC spokesman, plans must include analysis on how a firm's resolution plan addresses "global cooperation with foreign regulators, multiple insolvencies of subsidiaries, counterparty derivative actions, maintenance of critical operations, and funding and liquidity."

"It's going to be an important pressure point for the big banks," said Simon Johnson, former chief economist of the International Monetary Fund and now a professor at the MIT Sloan School of Management. …

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