Agencies: Banks Must Fill Gaps in 2015 Living Wills, or Else

WASHINGTON — Regulators sounded blunt criticism Tuesday on the quality of "living wills" submitted by the most complex banks, but said they will give firms more time to improve their resolution plans before subjecting them to formal repercussions mandated by the Dodd-Frank Act.

The Federal Deposit Insurance Corp. and Federal Reserve Board said they found common "shortcomings" in the 11 banks' 2013 plans, including that banks have "unrealistic" assumptions about how investors and others would behave in a bankruptcy. The agencies' long-awaited statement — the first piece of substantive feedback on the resolution plans — said banks must address each identified weakness in their 2015 submissions or institutions could face regulatory consequences.

"While the shortcomings of the plans varied across the first-wave firms, the agencies have identified several common features of the plans' shortcomings," the FDIC and Fed said in a joint press release. (The agencies said they sent letters to each of the 11 banks identifying specific flaws.)

Since the banks began filing the annual plans in 2012, the two agencies have used the early submissions to craft general guidance for how the firms apply changes to the yearly updates. But Tuesday's action was the first time regulators had expressed a real opinion about banks' progress. Some had faulted the agencies for not offering feedback before 2014 plans were completed last month.

Under Dodd-Frank, roughly 130 companies with over $50 billion in assets must complete annual living wills to outline how they would be taken apart in a bankruptcy, but the regulators have staggered filing deadlines based on size and complexity. The 11 banks deemed highly complex are on the most advanced schedule, having turned in their third draft in July.

While the agencies noted some improvements in their second-round submissions compared with the inaugural plans, the banks also made "assumptions that the agencies regard as unrealistic or inadequately supported," they said.

The FDIC and Fed also criticized the level of complexity in how firms presented their legal structures. The banks failed "to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution," the regulators said.

A separate assessment by FDIC Vice Chairman Thomas Hoenig — perhaps the federal regulator most critical of the biggest banks — was especially direct.

"Unfortunately, based on the material so far submitted, in my view each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis," Hoenig said in a statement.

"Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support."

Although the two agencies mostly spoke with one voice, they also indicated there was some disagreement about how exactly to proceed in grading early rounds of wind-down plans.

According to the press release, the FDIC's board of directors had determined that the 11 banks' plans were "not credible." Under Dodd-Frank, such a finding triggers a series of steps for banks to submit revisions. If the regulators are still unsatisfied, the process could ultimately result in officials forcing banks to restructure in order to become more resolvable.

The Fed apparently chose not to go that far so soon, and the regulators agreed to provide banks the opportunity to address shortcomings in their 2015 plans.

"The agencies agreed that in the event that the first-wave filers have not, on or before July 1, 2015, submitted plans responsive to the identified shortcomings, the agencies expect to use their authority … to determine that a resolution plan does not meet the requirements of the Dodd-Frank Act," the press release said.

The actions banks must take in 2015 plans to demonstrate progress include establishing simpler legal structures to improve resolvability, developing holding company structures consistent with resolvability, amend contracts to allow a stay of early termination rights for certain counterparties and ensuring the continuation of services supporting critical operations.

The agencies also said 2015 submissions must demonstrate "operational capabilities for resolution preparedness, such as the ability to produce reliable information in a timely manner."

FDIC Chairman Martin Gruenberg said in a prepared statement that the joint letters sent by the regulators to each of the banks outline steps meant to significantly improve their resolution plans.

"These letters provide a set of changes for the firms to implement which will make a meaningful difference in the ability to resolve these firms in an orderly manner in bankruptcy, and reduce the risk they pose to the financial system," Gruenberg said.

In a separate statement, the Fed said it "expects to find" future resolution plans not addressing the identified flaws "to be deficient."

Under the law, the central bank said, "the board and the FDIC may act jointly to require a firm to take specific actions to improve the firm's resiliency and resolvability if the agencies jointly determine that the resolution plan filed by the firm is not credible or would not facilitate an orderly resolution of the firm under the U.S. Bankruptcy Code."