Regulators flag problems with Credit Suisse and BNP's living wills

WASHINGTON — In a joint-review issued Friday, the Federal Reserve and the Federal Deposit Insurance Corp. identified problems with two institutions' targeted bankruptcy resolution plans, commonly referred to as living wills. 

Of the 71 bank resolution plans reviewed by the agencies, only BNP Paribas and Credit Suisse faced any supervisory problems. The regulators said that Credit Suisse's plan had shortcomings "pertain[ing] to resolution planning, cash flow forecasting capabilities and governance for their U.S. operations." The agencies further characterized the bank's plan as poorly constructed, lacking, "the core elements of capital, liquidity, and the Covered Company's plan for executing recapitalizations as required by the Resolution Plan Rule."

The agencies say the bank did not clearly outline its methods for identifying client information needed to continue payment and clearing services, nor did it assess the impact of a resolution process on its clients and associates.  The review indicated the bank's , "most significant omission was the failure to adequately describe the liquidity and capital capabilities" that are necessary to execute the firm's U.S. resolution strategy."

Bloomberg News

As a result, agencies direct Credit Suisse to submit a revised 2021 plan incorporating previous feedback and "detailed project plans" with additional information to "strengthen its U.S. resolution planning oversight, including processes to ensure that future "assertions regarding shortcoming or deficiency remediation efforts are accurate and valid" and another outlining how they plan to improve the accuracy of their cash flow forecasting.

The Switzerland-based bank has had dustups with regulators before, notably an enforcement action from the Fed and New York State Department of Financial Services in 2020 criticizing the bank's anti-money- laundering practices. But the interagency review demonstrates that regulators still find the bank's internal risk controls to be lacking. 

The Dodd-Frank Act compels banks overseen by the two agencies to present periodic plans outlining their strategy for resolution in the event of serious distress or failure. Institutions must submit a varying degree of information at intervals depending on its size and complexity.

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The regulators also identified somewhat less-serious "shortcomings" with BNP Paribas's resolution plan. Regulators say BNP failed to incorporate feedback from a 2018 joint review directing them to "explain how repurchase agreement activity — including daily trading and settlement, oversight, and risk management — would continue in resolution in the event the U.S. broker-dealer fails." 

To address this shortcoming, the agencies directed BNP, as part of its 2024 resolution plan submission, to "describe how the repurchase agreement activity, which depends on operational interconnections between the U.S. broker-dealer affiliate and the Covered Company's cross-border operations, will continue to operate following the failure and during the resolution of the firm's U.S. operations."  

A handful of companies — including Barclays, Deutsche Bank and HSBC — also received individual letters encouraging the respective depository institutions to continue making progress in strengthening their resolution strategies.

Other banks have recently come under fire for insufficient living wills. Last month, the agencies directed Citigroup to promptly fix issues with its resolution plan, also citing concerns about its ability to prepare for a bankruptcy.