WASHINGTON — Although regulators proposed new standards Tuesday for firms to plan their own wind-downs, they made clear that the guidelines — and companies' initial compliance with them — are meant to be just the start of crisis planning.
The proposal by the Federal Deposit Insurance Corp. outlined minimum requirements for so-called "living wills," set time lines for submitting plans and discussed procedures for cases when regulators find a firm's resolution plan is too thin. The Federal Reserve Board, which is required to craft the rule along with the FDIC, is expected to sign off later this week.
But FDIC board members indicated that the resolution plans are not meant to be generic or one-time reports, saying the plans will require continuous updates.
"These are not going to be plans that are simply sent" to the agencies, said Martin Gruenberg, the vice chairman of the FDIC. "This is going to be a dynamic process."
John Walsh, the acting comptroller of the currency, agreed that agencies and firms should maintain "continuing dialogue to keep [plans] relevant." He said plans should be tailored to a firm's uniqueness.
"It will be important to recognize that the range of acceptable outcomes may be large," Walsh said. "We shouldn't really be expecting, or seeking, plans that fit a single approach or trademark."
The living wills, required by the Dodd-Frank Act, are designed to give regulators a road map on how otherwise healthy firms could one day be cleaned up if they ever failed, attempting to prevent the government from being unprepared for future crises. The law also gave the FDIC enormous new resolution powers to seize firms deemed too big to be wound down through bankruptcy.
"Historically, systemically important financial companies and regulators expended very little effort in considering the possible effects of a complex institution's failure until the eleventh hour, when the opportunity to plan and be proactive had been lost, and being … reactive to a crisis became the de facto course of action," James Wigand, the head of a new FDIC division on systemically important institutions, said in a presentation to the board. "This requirement changes that paradigm."
Under the proposal, which the industry has two months to comment on, firms are required to submit a living will no later than 180 days after the rule becomes effective. The requirements apply to systemically important nonbanks overseen by the Fed, and bank holding companies with at least $50 billion of assets. In addition to the Fed and the FDIC, plans will also be reviewed by the Financial Stability Oversight Council.
Under the proposal, a plan is required to include an executive summary, a strategic analysis laying out a plan's elements, an outline of a company's organizational structure, as well as information about its management information systems and interconnectedness with other entities.
A firm would have to map its business lines to legal entities; provide analysis of its corporate structure; and discuss credit exposures, liquidity, capital and cash flows. The plan would also include material on the domestic and foreign jurisdictions in which a company operates. In addition, a company would have to undertake a "strategic analysis" of how it could be subject to the bankruptcy code without posing systemic risk.
"Resolution plans need to clearly lay out the structure and activities of the organization, as well as its counterparty exposures, so we are never again forced to make the choice between bailing out an institution or creating real and lasting harm for our financial system," said FDIC Chairman Sheila Bair.
The reporting requirements would be ongoing. After an initial living will is submitted, companies must provide revised plans annually, as well as give regulators updates no later than 45 days after a material change in a company's business operation. Firms would also be required to report on their credit exposures no later than 30 days after each quarter.
"The FDIC and the Federal Reserve wield considerable authority to shape the content of these plans, first in this rulemaking, and second through ongoing monitoring of the institutions' compliance" with rules, Bair said.
As the law and proposal make clear, the Fed and the FDIC are charged with keeping an eye on firms that they feel have not produced a viable product. The FDIC and Fed can provide written notice to an institution that its living will is not credible, after which time the firm has 90 days to respond with an improved plan - although that time period can be adjusted.
If the revised plan is still not to the agencies' liking, it could face stricter requirements on capital, leverage and liquidity. If a sufficient plan is still not completed two years after such restrictions are imposed, the Fed and the FDIC - in consultation with FSOC - can force asset divestitures necessary to ensure the firm could be resolved smoothly.
"Let's be clear: We will require these institutions to make substantial changes to their structure and their activities if necessary to ensure orderly resolution," Bair said.
But Walsh expressed concern that strict standards imposed by the living-will requirements could come into conflict with a firm's normal business operations.
"It is likely there will be conflicts at times between planning for sound and efficient business operation and planning for resolution," he said. "Preparing sensible plans will require a careful balance among the pursuit of profitable operation of the enterprise, meeting the needs of the economy for efficient intermediation, and providing an effective path to resolution."
