Resolvability Assessments

KA10.1 Resolution authorities should regularly undertake, at least for G-SIFIs, resolvability assessments that evaluate the feasibility of resolution strategies and their credibility in light of the likely impact of the firm’s failure on the financial system and the overall economy. Those assessments should be conducted in accordance with the guidance set out in Annex II.

KA10.2 In undertaking resolvability assessments, resolution authorities should in coordination with other relevant authorities assess, in particular:

(i) the extent to which critical financial services, and payment, clearing and settlement functions can continue to be performed;

(ii) the nature and extent of intra-group exposures and their impact on resolution if they need to be unwound;

(iii) the capacity of the firm to deliver sufficiently detailed accurate and timely information to support resolution; and

(iv) the robustness of cross-border cooperation and information sharing arrangements.

KA10.3 Group resolvability assessments should be conducted by the home authority of the G-SIFI and coordinated within the firm’s CMG taking into account national assessments by host authorities.

KA10.4 Host resolution authorities that conduct resolvability assessments of subsidiaries located in their jurisdiction should coordinate as far as possible with the home authority that conducts resolvability assessment for the group as a whole.

KA10.5 To improve a firm’s resolvability, supervisory authorities or resolution authorities should have powers to require, where necessary, the adoption of appropriate measures, such as changes to a firm’s business practices, structure or organisation, to reduce the complexity and costliness of resolution, duly taking into account the effect on the soundness and stability of on-going business.

To enable the continued operations of systemically important functions, authorities should evaluate whether to require that these functions be segregated in legally and operationally independent entities that are shielded from group problems.

Essential criteria

EC10.1 If the jurisdiction under review is home to one or more G-SIFIs, or domestically incorporated

205 DFA Section 210 (a) (1) (N).

firms that are subject to a requirement for resolution plans, arrangements and processes are in place whereby the resolution authorities undertake, in cooperation with members of the firm’s CMG group resolvability assessments regularly, including when there are material changes to the firm’s business or structure.

Description and findings re EC10.1

DFA. The FDIC has undertaken initial assessments of the feasibility and credibility of the resolution strategies prepared under DFA Title II for the U.S.-based G-SIBs with significant cross-border operations. In accordance with FSB requirements, the assessments comprise the

following aspects

(i) the identification of resolution strategies that would be feasible, in view of resolution tools available, the firm’s recovery and resolution plan; and the authorities’ capacity to apply the tools at short notice and other domestically incorporated banks that are subject to resolution planning requirements;

(ii) the credibility of all resolution strategies deemed feasible, in view of the likely impact of the firm’s failure on global and national financial systems and real economies; and (iii) the determination of actions that may be necessary to improve resolvability, possibly including changes to the firm’s recovery and resolution plan, or its structure or operations.

The results of the FDIC’s preliminary assessments have been discussed in the CMGs of U.S.-based G-SIBs, with the aim to deepen the analysis of potential impediments to orderly resolution of the firms (also see EC 8.1).

Documentation provided to the mission indicates that the breadth and contents of the FDIC’s approach to resolvability assessments is aligned with the FSB’s detailed guidance thereon.²⁰⁶ In particular, the assessments cover aspects pertaining to (a) firms’ structure and operations, (b) intragroup exposures, (c) continuity in FMI membership, (d) management information systems, and (e) coordination of national resolution regimes and tools (together amounting to an assessment of the feasibility of resolution strategies); together with an analysis of impact of a firm’s failure on financial markets, FMI, funding conditions, capital and the broader economy.

Where practicable, the analyses are informed by the modalities of the SPE strategy, including the expectation that operating subsidiaries will remain intact and that the continuity of critical functions can be ensured.

At the time of the mission, the FDIC had not yet finalized similar assessments for smaller BHCs that that are subject to resolution planning requirements. Similarly, the agencies had not completed group resolvability assessments for NBFC that are deemed to be systemically important.

Banking. All of the U.S. based G-SIBs that have IDIs are required to submit resolution plans under the FDI Act. The assessment of the resolvability of such firms is ongoing as part of the group-wide resolution plans that are discussed at the level of the CMGs. The FDIC participates in the discussions, as highlighted above.

State Insurance. The state commissioners were not involved in the preparation of resolvability assessments, but have been consulted as part of the agencies’ review of the living wills of relevant firms.

Findings. The preparation of group resolvability assessments for G-SIBs is in train, with initial

206 See Appendix I-Annex 3 of the KA.

assessments having been discussed in the banking groups’ CMGs. Similar assessments are not yet in train for designated NBFCs, and are not envisaged for other domestically incorporated firms, including other BHCs subject to Title I resolution planning requirements .

EC10.2 If the jurisdiction under review is host to one or more G-SIFIs, or domestically incorporated firms that are subject to a requirement for resolution plans, it has in place arrangements and

processes whereby the resolution authorities cooperate with the home jurisdiction and contribute to the development of the resolvability assessments were invited to do so by the home jurisdiction, including by sharing results of local resolvability assessments with the home authority.

Description and findings re EC10.2

DFA. In line with FSB guidance, the preparation of resolvability assessments for G-SIFIs

headquartered in countries other than the U.S. is the responsibility of the firm’s home authority.

The U.S. authorities contribute to the preparation of group resolvability assessments for non-U.S.

based G-SIFIs to the extent that they are represented in the firm-specific CMGs (also see KA 8).

Banking. A number of foreign-owned IDIs are required to submit resolution plans under the FDI Act, some of which belong to banking groups that have been designated as systemic at a global level (e.g., Deutsche, HSBC, Santander). The assessment of the resolvability of such firms is ongoing as part of the group-wide resolution plans that are discussed at the level of the CMGs that are chaired by the home authorities. The FDIC participates in the discussions.

State Insurance. The preparation of resolvability assessments for foreign-owned G-SIIs is, generally speaking, less advanced than for the G-SIBs. State commissioners, however, contribute to the extent that they participate in the CMGs of the relevant firms.

Findings. The resolvability of U.S. operations of foreign G-SIFIs is being incorporated in the discussions of group-wide resolvability assessments in the CMGs.

EC10.3 The supervisory authorities or resolution authorities have the power to require changes to a firm’s business practices, legal, operational or financial structures or organisation that are necessary to improve the resolvability of the firm.

Description and findings re EC10.3

DFA. The ability of resolution authorities to mandate changes to a firm’s business practices, legal, operational or financial structures or organization—with a view to improve resolvability in situations where the firm itself fails to take measures to address identified impediments—is a cornerstone of effective frameworks for resolution planning. The U.S. FBAs have a number of statutory powers to require the adoption of measures that can help to reduce the complexity and costliness of resolution.

Pursuant to Section 165(d) of the DFA, the FRB and FDIC are required to jointly review

institutions’ plans for orderly resolution under the U.S. Bankruptcy Code, as governed by DFA’s Title I. Whenever they jointly determine that the plan is not credible or would not facilitate an orderly resolution of the company, they shall inform the company in writing of such

determination. Failure to resubmit the plan with revisions that address the agencies’ concerns within 90 days (subject to extensions granted by the agencies) may result in formal actions being taken against the company, which shall remain in force until the company resubmits a plan that remedies the deficiencies. Such actions may incline the imposition of more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or

operations of the company (or any subsidiary thereof).

If the company fails to submit an acceptable plan within two years from the imposition of the

afore-mentioned measures, the agencies may order the company to divest certain assets or operations to facilitate an orderly resolution.²⁰⁷ Prior to issuing a notice of deficiencies, determining that additional requirements should be imposed or issuing a divestiture order that is likely to have a significant impact on a regulated subsidiary or IDI of the company, the FRB is required to consult with each FSOC member that is involved in the supervision

thereof.²⁰⁸

In addition, the FRB is authorized to impose additional prudential standards on NBFCs and BHCs with consolidated assets greater than $50 billion.Such standards could include the introduction of a contingent capital requirement; enhanced public disclosures; short-term debt limits; and any other prudential standards that the FRB may deem appropriate. Again, any requirement that is likely to have a significant impact on a regulated subsidiary or IDI of the company warrants prior consultation of each FSOC member that is involved in the supervision thereof.

In the joint press release on the findings of their review of the second iteration of the DFA Title I resolution plans for the largest firms (total consolidated assets > $250 billion), the agencies indicated that they expect to use the afore-mentioned authority if the identified shortcomings are not addressed in the next iteration of the firms’ submissions.

Banking. Neither the FDI Act, nor the IDI Rule provide specific powers to require changes to a firm’s business practices, legal, operational or financial structures or organization that may be deemed necessary to improve the resolvability of the firm. However, the FBA has a wide range of supervisory options when an IDI is not complying with U.S. laws, regulations or supervisory orders, or is engaged in unsafe or unsound practices. Given that certain organizational or operational impediments to resolution may also be considered unsafe and unsound

practices—for example the non-ability of covered IDI to ensure continuity of critical services and ensure timely and accurate reporting—the FDIC is of the view that the regular supervisory toolkit could be leveraged to improve IDIs’ resolvability.

Pursuant to the FDIA and other acts, the FDIC and other FBAs have the authority to, among others, impose cease and desist orders, remove board members from office, impose monetary penalties on IDIs or their board members, facilitate mergers and take prompt corrective action against undercapitalized IDIs.

State Insurance. To a certain extent, the insurance commissioners have statutory power under state laws to require changes to a firm’s business practices or structures or organization to improve its resolvability before entering into receivership. Although improving firms’

resolvability is not necessarily the primary objective of the relevant legislation, the

commissioners have certain broad group-wide supervisory powers to direct/prohibit actions in a company (i.e., required regulatory approvals) and additionally, commissioners are able to require insurance companies to take certain actions with regard to its operational or financial structure after placing it into special administrative supervision.

Traditionally, the main focus is on dialogue and informal influence on the insurance companies to adjust their business practices in case of indications for potential pending financial distress. After an insurance company has been put into receivership, the

commissioner as receiver is permitted to make any changes to a firm’s legal, operational or

207 DFA Section 165(d) (5) (B) (ii).

208 12 CFR § 243.7.

financial structures or organization depending on prior court approval.

Findings. The agencies have broad powers under the DFA to require changes to the business practices, legal, operational and financial structures, or organizations of designated NBCFs and BHCs that are subject to Title I resolution planning requirements, with the aim to address impediments to effective resolution. The FDI Act does not provide for specific powers to improve resolvability, but does provide for broad powers to correct, or otherwise address, any practice or condition that the FBAs consider to be unsafe and unsound. State law only provides for powers to make similar changes to insurance firms under certain supervisory powers and in the case of special administrative supervision when the relevant conditions have been met. .

Assessment of KA10

Comments The authorities have made progress preparing resolvability assessments, focusing—

understandably—on the U.S.-based G-SIBs, in view of the serious adverse effects that their failure could have on financial stability in the U.S. Going forward, efforts to prepare resolvability assessments should be broadened, with the aim to ensure that resolvability assessments are prepared for all institutions whose failure could have serious adverse effects on the U.S. financial system and overall economy.

The preparation of resolvability assessments is particularly relevant for complex insurance groups that have been designated by the FSOC for FRB supervision to gauge the feasibility of an SPE resolution strategy under the OLA. Via the resolvability assessment, the

authorities can effectively (a) enhance awareness of the implications of initiating resolution procedures against NBFCs under DFA Title II; (b) identify factors and conditions that may adversely affect the effective implementation of Title II resolution actions; and (c) help determine specific actions necessary to achieve greater resolvability.

The agencies have broad powers under the DFA to require changes to the business practices, legal, operational and financial structures, or organizations of designated NBCFs and BHCs that are subject to Title I resolution planning requirements, with the aim to address impediments to effective resolution. The FDI Act does not provide for specific powers to improve resolvability.

State law provides for powers to make similar changes to insurance firms through the exercise of certain supervisory powers and under administrative supervision.