U.S. regulatory guidance improves quality of resolution plans, but more work remains

October 27, 2015

Banks need to improve data management and reporting practices in their U.S. mandated resolution plans, but they have nonetheless made progress in meeting regulators’ expectations with the help of customized playbooks on issues such as governance, reporting, and management information systems, participants learned in a webinar by consultancy Deloitte

Guidance from regulators 

The Federal Reserve Board, and to a lesser extent the Federal Deposit Insurance Corp, have provided clarification on their increased expectations for the “living will” resolution plan requirement of the Dodd-Frank Act. The Fed issued two critical supervisory letters ( SR 14-1 and SR 14-8 ) in 2014.

SR 14-1 listed steps that could improve bank operational resiliency and contingency planning. These include capabilities that would allow a clear analysis of funding sources, a comprehensive understanding of exposures, an effective process to value and manage collateral, and better management information systems capabilities that can generate key data on a legal entity basis and controls ensuring data integrity. They also include robust arrangements that guarantee continued provision of shared or outsourced services to maintain critical operations.

If SR 14-1 focused on technical matters, SR 14-8 provided more of a roadmap to strong internal governance framework and a thorough impact assessment program. It detailed recovery options and identified potential impediments to a recovery process and offered ways to mitigate them.

Both letters supplement the Dodd-Frank Act’s Title I enhanced prudential regulation framework. That stipulates that bank holding companies submit resolution plans on an annual basis –by July 1st for the largest ones, and by year-end for the rest. These plans are to include critical and detailed information of an institution’s material entities, its business lines, its management information system as well as the concrete steps it needs to take during a resolution or a possible recovery process.

The FDIC, for its part, issued similar guidance on a number of areas including corporate governance, identification of counterparties, critical services and operations, assumptions of stress scenarios, resolution obstacles and their mitigation for insured depository institutions in December 2014.

It is with these documents in mind that the regulators evaluated this year’s submissions.

Lessons learned from the living wills 

The specific feedback and strongly worded press statements from regulators in 2014 –- citing unrealistic or inadequately supported assumptions and obstacles to resolvability among other shortcomings — have prodded the firms to think harder about their living wills.

It is the Fed’s Supervisory Assessment of Recovery and Resolution Preparedness (SRP), however –another regulatory initiative — that transformed this annual routine into a pop quiz for measuring a firm’s progress in its resolution capabilities. It is essentially a horizontal review of firms’ operations that support recovery and remove impediments for a successful resolution.

The common evolving practices that have emerged in this year’s round of submissions include more thorough information on material entities, including a holistic legal entity structure, discussions of steps taken or planned to make the firm more resolvable, and removal of potential impediments.

Firms went beyond simply outlining their preferred resolution strategy, testing and validating their assumptions, either through a third party, an internal audit, or both. They have also demonstrated improved capabilities in dealing with liquidity funding needs, collateral management, and shared services through specific playbooks. These playbooks enumerate a clear process flow, including key people, what systems will be used and how they will be linked to other procedures that may affect the rest of the firm.

Expectations for the next round of submissions 

Despite notable progress in these areas, challenges remain for banks, said Marlo Karp, a partner with Deloitte.

“The fact that a large number of processes to obtain data are still manual and time consuming, and that the data itself is fragmented across a number of business lines or geography increase operational risk at a time when it may be needed the most,” she said at the Deloitte webinar.

Furthermore, firms have not yet integrated the concept of resolution planning into their business as usual operations. They do not yet link it, for example, with other areas such as new product approval, or liquidity reserves. Nor have they demonstrated a robust range of options regarding different failure scenarios and alternative resolution approaches. Firms have also been debating how often and how much testing and validation should be used to reach a definite conclusion.

A more integrated regulatory framework 

Drafting living wills has not been a smooth process for most of the firms. As FDIC Chairman Martin Gruenberg stated in a speech in May 2015, “there has been no greater or more important regulatory challenge in the aftermath of the financial crisis than developing the capability for the orderly failure of a systemically important financial institution.” They have made progress on many fronts, however, mainly through the development of playbooks on different issues that helped them identify gaps, assess the recovery processes in place, and improve on them. Integrating them into their business as usual processes will be the next step.

(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on (Oct. 16, 2015). Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @RiskMgment)

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