Large Bank Resolution: FRB, FDIC Joint ANPR

Increasing concentration in the $250-$700 billion asset size prompts regulators to consider changes to LBO resolution requirements

KPMG Insights. The FRB has identified a “rigorous review” of resolution plans in light of the increasing concentration of non-GSIB institutions (specifically, institutions with the $250 billion to $700 billion in total assets) as one its “near term goals.” Notably, this review is being conducted alongside active reviews of large bank capital requirements and potential updates to other prudential standards. Proposed new capital standards are expected to be released “as soon as possible” though industry participants have expressed concern that increased capital requirements will restrict credit in a weakened economy. The FRB is also reviewing bank merger analysis, focusing on concentration, competition, community/consumer impacts, and financial stability. These areas are linked through the FRB’s tiering framework for enhanced prudential standards.

The Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) jointly issued an ANPR seeking public comment on potential changes to the resolution-related rules and guidance applicable to large banking organizations (LBOs) that are not global systemically important banking organizations (GSIBs) and also their insured depository institution subsidiaries (IDIs). In general, the agencies are considering whether to apply to LBOs and their IDIs certain more stringent resolution requirements that are now applicable only to GSIBs. (See tiering framework below.)

The agencies state that non-GSIB LBOs have experienced “noteworthy increases in size” in the past few years through organic growth and merger activity; similarly, the agencies suggest LBOs are growing more complex due to increased reliance on uninsured deposits, heightened cross-jurisdictional activities, and significant nonbank operations. They suggest, in combination, these features can complicate and potentially narrow options for resolution in the event of material failure or distress. The ANPR seeks input on whether certain resolution-related standards imposed on GSIBs—including “loss-absorbing resources”—might be adapted for use with LBOs and/or their IDIs, potentially increasing the options available for resolution, especially in cases where the LBOs have average total assets of $250 billion or more.

The resolution requirements being considered for LBOs and their IDIs, and questions/issues highlighted by the agencies, follow.

Long term-debt at the holding company-level and/or the IDI level. Questions consider:

The optimal structure of the debt, and which entity would be the ideal issuer (holding company or IDI) to ensure the debt remains available to utilize in resolution.
Whether all Category II and III LBOs should be subject to the long-term debt requirement or whether the applicability of the requirement should be determined by certain factors.
Whether an LBO’s resolution strategy (single point of entry or multiple point of entry) or the issuer of the debt (holding company or IDI) should determine need for the requirement
The calibration of the debt requirement, such as percentage of risk-weighted assets
The ability of LBOs in different categories (II or III) to issue debt into the market and potential impacts to the resiliency of the LBO.

Eligibility criteria for long-term debt (in alignment with the GSIB TLAC (total loss absorbing capital) requirements), including requirements that i) the debt be issued at the top-tier holding company level, and ii) the top-tier holding company be a “clean holding company” (including prohibitions on the issuance of short-term debt to external investors or entry into derivatives and other types of financial contracts and arrangements). Questions consider:

Whether debt issued by the principal IDI should count toward the top-tier holding company requirement.
The impact of “clean holding company” limitations on resolvability.
The need for any additional criteria or debt characteristics.

Disclosure to long-term debt investors regarding the potential treatment of the debt in a resolution and the financial consequences of entering into a resolution proceeding.

Identification of executable “separability options” such as the sale, transfer, or disposal of significant asset, portfolios, legal entities, or business lines that can create alternatives to a wholesale acquisition of a large bank’s operations.

Comments will be accepted for a period of sixty days following publication in the Federal Register.

Tiering Framework. The agencies’ joint final rule on resolution plans (published 2019) relies on a risk-based tiering framework that applies the most stringent requirements to the largest, most complex firms. It is based on the FRB’s tiering framework for enhanced prudential standards (also published 2019).

GSIBs are identified as Category I banking organizations based on a methodology that considers size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. They are considered the largest, most interconnected U.S. bank holding companies.
LBOs, including Foreign Banking Organizations (FBOs), are identified as Category II, III, or IV banking organizations based on a combination of their size and risk profile.
- Category II:
  - U.S. banking organizations with $700 billion or more in total assets, or $100 billion or more in total assets that have $75 billion or more in cross-jurisdictional activity.
  - FBOs with $700 billion or more in combined U.S. assets, or $100 billion or more in combined U.S. assets that have $75 billion or more in cross-jurisdictional activity.
- Category III:
  - U.S. banking organizations have between $250 billion and $700 billion in total assets, or $100 billion or more in total assets that have $75 billion or more in off-balance sheet exposures, nonbank assets, or short-term wholesale funding.
  - FBOs with between $250 billion and $700 billion or more in combined U.S. assets, or $100 billion or more in combined U.S. assets that have $75 billion or more in off-balance sheet exposures, nonbank assets, or short-term wholesale funding.
- Category IV:
  - U.S. banking organization with less than $250 billion in total assets and do not meet Category II or III risks factors (cross-jurisdictional activity, off-balance sheet exposures, nonbank assets, short-term wholesale funding) are not required to file a resolution plan.
  - “Other FBOs” that have $250 billion or more in global consolidated assets that are not subject to Category II or III standards are subject to resolution planning requirements.