Why the OCC is Forcing Big Banks to Develop 'Recovery Plans'

WASHINGTON — The Office of the Comptroller of the Currency's unexpected move to require the largest banks to develop a "recovery plan" has raised questions about why the agency is moving now and how its mandate differs from regulatory requirements for institutions to develop "living wills."

Under the Dodd-Frank Act, the Federal Reserve Board and Federal Deposit Insurance Corp. must force the biggest banks to submit detailed plans on how they can be dismantled in the event of a crisis. But the OCC is acting of its own accord to issue new guidance soon that would mark a subtle but important difference. It wants banks with more than $50 billion of assets to create a plan to survive a crisis, rather than help regulators take the institution apart.

"I believe recovery planning must be an integral part of institutions' corporate governance structures and processes and be effectively supported by banks' boards of directors and management," said Comptroller Thomas Curry in a statement to American Banker. "To promote effective recovery planning among banks with $50 billion or more in total consolidated assets, we plan to seek comment on proposed enforceable guidelines that establish minimum standards for recovery planning very soon."

Curry first raised the idea in 2013 during Congressional testimony, but it has been overshadowed by the "living will" process. The guidance is expected to require big banks to provide details on how it would survive operational and financial stresses under different scenarios.

In a way, the guidance will be a merger of living wills and stress tests, which also attempt to gauge an institution's ability to weather a financial storm.

The OCC's guidance "is something that is coming out of left field, but it is completely consistent with what regulators have been doing," said Ed Mills, policy analyst with FBR Capital Markets. "I view this as… just belt and suspenders."

Some observers suggested the OCC's effort may be an attempt to fix problems the FDIC and Fed highlighted after most of the biggest banks effectively failed the first round of living wills. The agencies concluded the banks' plans were not detailed enough, but stopped short of starting a regulatory clock that would have given institutions a year to make necessary fixes before facing supervisory consequences.

"The intent of the living wills was to make financial institutions be more forward thinking, and they found they're not necessarily getting that through with the living wills," said Tristram Wolf, an associate in the consumer financial services group at Ballard Spahr. "And so this [OCC guidance] is a doubling-down or an attempt to push that approach even further to make banks of smaller size think about their operation in terms of recovering from a financial crisis."

The OCC's guidance is expected to require a large bank to show how different severe stress scenarios would affect the bank and options for recovery in each case. OCC examiners would assess the plan for appropriateness and adequacy as well as how it's integrated into the bank's overall risk management and corporate governance.

"At the OCC, we are uniquely focused on ensuring national banks and federal savings associations operate in a safe and sound manner and that includes recovering quickly and effectively when they face severe stress," Curry said. "Effective planning is critical to the resiliency of banks' core business lines and critical operations, particularly among our largest and most complex institutions."

Details of the plan were first revealed by Bloomberg News, and it's not clear when the OCC will release more information.

Jaret Seiberg, an analyst with Guggenheim Securities, said he expects it to be a "multi-faceted plan" with requirements focusing on liquidity and capital adequacy. It will likely coincide with the Fed's Comprehensive Capital Analysis and Review stress test requirements for bank holding companies, as well as a new liquidity coverage ratio requirement.

"We believe the OCC initiative could be another impediment to large capital returns as it could mandate that the national bank — and not just the holding company — holds more capital," Seiberg wrote in a note to clients. "Another key aspect for survival is to convince depositors and borrowers that the bank is safe and sound. To us, that would suggest the OCC would want to see a robust plan for how the bank would explain its financial position to customers and the public."