Resolution Plans: FDIC Final Rule

KPMG Insights:

• Resolution scenarios: Not updated since 2012, the final rule sets forth resolution scenario analysis in planning, including bridge depository institutions and varied resolution options.
• “Tailored” requirements/changes: Submissions and filings dependent on total assets ($50B to $100B, equal/over $100B) with added differentiation for affiliates of U.S GSIBs.
• Financial risk management: Regardless of size, expect continued supervisory focus on resolution and liquidity risk strategy, management, and governance as well as scrutiny of merger-related activity. 

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June 2024

The Federal Deposit Insurance Corporation (FDIC) issues a final rule to require the submission of resolution plans by insured depository institutions (IDIs) with $100 billion or more in total assets and information filings by IDIs with at least $50 billion but less than $100 billion in total assets. The requirements facilitate the FDIC’s use of its authority under the Federal Deposit Insurance Act (FDI Act) to resolve an IDI in the event of insolvency.

In final form, the rule retains most key features from the proposal (see KPMG Regulatory Alert, here) including:

• A “tailoring” of requirements based on asset size, including content and timing of full resolution submissions and interim supplements.
• A credibility standard for reviewing and assessing full resolution submissions.
• Expectations for engagement and capabilities testing.

Key changes from the proposed rule include:

• The addition of a third cohort for IDIs that are affiliates of U.S. global systemically important banks (GSIBs).
• A shift to a three-year submission cycle for all IDIs other than those affiliated with U.S. GSIBs.
• The introduction of an intermediate level of feedback that requires corrective action in the next full resolution plan rather than immediately (i.e. significant findings).

The final rule will take effect on October 1, 2024. All IDIs will receive a written notice specifying when their initial submissions are due. IDIs with $100 billion or more in total assets should anticipate a submission date that is at least 270 days from the effective date of the final rule. IDIs with at least $50 billion but less than $100 billion in total assets should anticipate a submission date that is at least one year from the effective date of the final rule.

FDIC Final Rule on IDI Full Resolution Submissions

The final rule amends the FDIC’s existing rule governing resolution plans for IDIs with $50 billion or more in total assets with regard to the content and timing of resolution submissions and related interim supplements to those submissions as well as how the credibility of resolution submissions will be assessed. The resolution submissions are intended to support the FDIC’s readiness in the event of material distress and failure of a large IDI.

Application and Submissions. The final rule applies to all IDIs with $50 billion or more in total assets (hereinafter, “covered IDIs” or “CIDIs”) and classifies them as follows:

• “Group A CIDIs”: CIDIs with $100 billion or more in total assets. Group A CIDIs are further divided into two filing categories:
  • Biennial Filers: Group A CIDIs that are affiliated with U.S. GSIBs will be required to submit a full resolution plan every two (2) years and an interim supplement every other year covering select items as outlined in the rule, except, no interim supplement would be required in any year in which the CIDI submits a resolution plan under the Dodd-Frank Act. (Note: this is a new classification based on comments received.)
  • Triennial Filers: Group A CIDIs that are not Biennial Filers will be required to submit a full resolution plan every three (3) years and an interim supplement in each intervening year covering select items as outlined in the rule.
  • Note: To adequately manage the volume of reviews in a given year, the FDIC will create three cohorts within Group A CIDIs for purposes of full resolution submission review, horizontal capabilities testing, and firm-specific engagement.
• “Group B CIDIs”: CIDIs with between $50 billion and $100 billion in total assets. Group B CIDIs are required to submit an “informational filing” (as defined in the rule) every three (3) years and an interim supplement in each of the intervening years covering select items as outlined in the rule. Note: The FDIC intends to create two cohorts within Group B for purposes of review, testing, and engagement, and may establish different calendar dates for submissions from those cohorts.

The asset size of CIDIs would be determined based on the average of the institution’s four most recent Consolidated Reports of Condition and Income. However, if an institution crosses either the $50 billion or $100 billion total asset threshold as the result of “a merger, acquisition of assets, combination or similar transaction”, it may, at the discretion of the FDIC, become a Group B CIDI or Group A CIDI, respectively, as of the consummation date of the transaction.

Notifications of “Extraordinary Event”. CIDIs will be required to provide notice and explanation within forty-five (45) days after an “extraordinary event” (referred to as a “material change” in the proposed rule) to the CIDIs organizational structure, core business, size or complexity; identification of material entities or franchise components; mergers or acquisitions; or capabilities described in the resolution submission, except in cases where the notice would fall within ninety (90) days before a regular submission.

Resolution Submission Contents. The final rule requires Group A CIDI resolution plans and Group B CIDI informational filings and their respective interim supplements to address the following contents categories.

Credibility & Review. The final rule incorporates a credibility standard consisting of two prongs for assessing the credibility of a Group A CIDI’s full resolution plan and a Group B CIDI’s informational filing. (Interim supplements will not be assessed under the credibility standard.) The FDIC may determine that a full resolution submission is not credible if:

• Prong 1: The identified strategy would not provide timely access to insured deposits, maximize value from sale or disposition of assets, minimize any losses realized by creditors, and address potential economic or financial stability risks.
• Prong 2: Information and analysis in the resolution submission is not supported with observable and verifiable capabilities and data and reasonable projections, or the CIDI fails to comply in any material respects with the requirements of the rule.

The FDIC states that it will review full resolution submissions (including informational filings) “promptly and endeavor to give feedback identifying material weaknesses or significant findings within one year of the full resolution submission date.” With regard to these findings:

• A “material weakness” is considered a weakness that would “significantly impact the FDIC’s ability to undertake an efficient and effective resolution of the CIDI or would increase the risk of a disorderly and value-destructive resolution if not promptly corrected.” For such findings, the CIDI must submit, within 90 days, a revised full resolution submission that addresses the material weakness identified and discusses the revisions made to address the weakness.
• A “significant finding” is one of “the completeness, sufficiency, and thoroughness of information provided, or the adequacy of a capability demonstrated, that could affect the resolution of the CIDI and should be addressed, but is not of the same level of impact and urgency as a material weakness.” A significant finding must be satisfactorily explained or addressed in the next full resolution submission and, if not, it may be found to be a material weakness.

Engagement & Capabilities Testing. The final rule also amends existing rules to expand direct engagement (information and access to personnel) and capabilities testing (demonstration of capabilities described in the full resolution submission, including the ability to produce timely and useful information and data underlying the resolution submission) between FDIC and CIDIs in the course of regular examinations. The FDIC expects that capabilities testing will be conducted concurrently with the full resolution submission review process (i.e., once every two- or three-years as appropriate) and across a cohort of CIDIs.

Effective Date. The final rule becomes effective October 1, 2024. All CIDIs will receive a written notice specifying when their initial full resolution submission or interim supplement is due. CIDIs that do not file a full resolution submission as their first submission following the effective date are required to provide interim supplements in the years prior to the date their first full resolution submission is due.

• Group A CIDIs will be required to comply with the amended rule beginning on the effective date and submit full resolution plans or interim supplements depending on their cohort’s required submission deadline, which is expected on or before a date that is at least 270 days from the effective date of the final rule.
• Group B CIDIs will be expected to submit their informational filings or interim supplements on or before a date that is at least one year from the effective date of the final rule.