Regulators Ease Up on Living Will Requirements

WASHINGTON — Banking regulators did not erase every worry aired by the largest financial firms over a requirement to provide "living wills" detailing how they could be taken apart, but by giving them more time to complete such plans, they eased a lot of the pain.

Observers said the Federal Deposit Insurance Corp. and Federal Reserve Board showed more flexibility than in their initial proposal released in April and clearly listened to the comment letters filed by large institutions and their representatives.

"Regulators learned from the comment process and talking to people about some of the things in the proposal that were less measured and less realistic," said Randy Guynn, a partner and head of Financial Institutions Group at Davis & Polk. "This final proposal shows more sensitivity. It is more usable and effective."

On Tuesday, the FDIC voted 3-0 to approve the final rule, which provided the largest financial institutions more time to draft and submit living will plans. The Fed is expected to approve the rule later this month.

Living wills, which are required as part of the Dodd-Frank financial overhaul effort, are designed to give regulators a road map on how otherwise healthy firms could one day be cleaned up if they failed, allowing the government to be more prepared in the event of a crisis. The regulatory reform law also gave the FDIC enormous new resolution powers to seize and dismantle firms deemed too big to be wound down through bankruptcy.

The final rule will apply to 124 financial firms. The FDIC approved a separate interim rule that would subject 37 federally insured banks and thrifts not subject to the bankruptcy code to similar resolution planning.

Under the initial April proposal, firms would have been required to submit their living will plans no later than 180 days after the rule became effective. But regulators opted to provide institutions more time under staggered phase-in periods. Under the final rule, the largest, most complex firms will be required to go first, helping to inform the process.

"They were going to have everybody submit resolution plans — some 124 institutions — at one time and review them in 60 days. That was always going to be unrealistic," said Guynn. "It will give the regulators some time to learn about the process from the largest institutions doing it first."

Now, institutions that have consolidated nonbank assets of $250 billion and above must submit their plans by July 1, 2012. Institutions with between $100 billion and $250 billion of assets must file their living wills by July 1, 2013. All remaining firms have until Dec. 31, 2013 to comply.

The rule would apply to systemically important nonbanks overseen by the Fed, bank holding companies with at least $50 billion in assets and foreign bank holding companies with U.S. financial operations.

FDIC officials said that after firms submitted their initial plans all would comply with one specific anniversary date thereafter for their annual reports.

Regulators made clear that Tuesday's agreement on the final rule would be viewed as the first of many steps in the process. The aim of the rule is to help regulators prevent the chaos seen in the financial markets following Lehman Brothers' collapse in September 2008.

"This notion of resolution planning is a new idea that has emerged out of the crisis and in the way that it's proposed in Dodd-Frank it has quite substantial remedies and penalties' that could be associated with failure to achieve it," Acting Comptroller of the Currency John Walsh said. "So, we are in some ways in unchartered territory, an iterative process to develop and maintain credible plans. I do appreciate the fact the various checkpoints included in the rule are a sensible approach to testing the regime… as we go forward."

Susan Krause Bell, a managing director at Promontory Financial Group, agreed regulators are taking a cautious approach, but said doing so might create some uncertainty.

"Regulators recognize that living wills will continue to improve over time and they don't necessarily expect the first one submitted by an institution to be as good and complete as the next one, and the next one after that," said Krause Bell. "The difficulty is banks first in line may wonder whether the requirements and the standards the agencies will use would change over time."

Separately, the FDIC issued another rule to clarify that government insured banks with $50 billion or more in total assets, which are not subject to the bankruptcy code, would also be required to make their own resolution plans under the Federal Deposit Insurance Act.

FDIC Acting Chairman Martin Gruenberg said the FDIC's rule "complements" its joint regulation with the Fed.

"These two rules will ensure the comprehensive and coordinated resolution planning for both the insured depository and its holding company and affiliates in the event that an orderly liquidation is required," said Gruenberg.

Insured depository institutions whose parent companies are subject to the living will rule would be required to submit their plans simultaneously.

Additionally, non-bank financial institutions that may be designated as sysemically important by the Financial Stability Oversight Council and overseen by the Fed also saw some relief. Under the new rule, those who will become subject to the new requirements will have 270 days to comply. Previously, regulators had only planned to give 180 days.

Regional banks also got a break after regulators specified that those institutions that are less systemically important could provide a tailored, less extensive living will plan for that reason.

"They've gone a fair distance on the concerns by tailoring the requirements a bit more on the size and complexity,' said Krause Bell. "But it remains a very significant requirement."

While the FDIC didn't change its language to alleviate concerns by foreign institutions, it did provide those banks additional time under its phase-in system. Foreign firms wanted regulators to specify that the threshold of $50 billion be applied to only total U.S. assets, not on a global basis, in order to seek possible exemption.

Another pressing concern for firms was the issue of confidentiality. Firms were concerned that proprietary information included in their living will plans would become publicly available, causing competitiveness concerns.

Instead, regulators opted to specify guidelines on what information would be made public and what information would be kept confidential. FDIC officials said that any information currently considered private would remain so.

Still, observers saw that as a first step, but said more work would be required.

"I don't think the debate is really over in terms of whether it's going to satisfy the concerns of the banks," said Krause Bell. "They still have to see how it plays out."