This week, regulators released the public sections of the “living wills” of nine of the world’s largest financial institutions, plans that were submitted to the Federal Deposit Insurance Corp. and Federal Reserve Board and required by Section 165(d) of the Dodd-Frank Act. The first round of resolution plans marks an important step in Dodd-Frank compliance efforts, with more than 100 additional institutions facing a similar requirement before the end of 2013. [Editor’s note: The rule generally applies to bank holding companies with more than $50 billion in assets as well as systemically important non-bank financial services companies.] As second- and third-round filers—whose respective deadlines are based on asset size—embark on this challenging but valuable task, they should keep in mind the following lessons learned from the first round:
1. Understand the Key Players. Resolution planning involves different groups whose input feeds into the ultimate work product.
- The Resolution Plan Team—The project managers of the resolution planning process and their team run the process. The resolution plan team serves as an information aggregator, project driver and thought leader for the bank’s process. The team typically includes senior legal, treasury, and risk management executives, as well as project managers, outside advisors and data compilers.
- The Front Office—The business people intimately familiar with each of the institution’s core business lines and critical operations are needed to provide the institutional knowledge at the crux of the plan, design resolution strategies, identify barriers or obstacles to resolution and develop assumptions.
- The Regulators—The FDIC, Federal Reserve Board, and potentially other regulators can be expected to engage in frequent dialog with the resolution plan team as the plan is being developed.
2. Allocate Sufficient Time and Resources. Resolution planning is a new and time consuming process. Advance planning combined with an early start is an absolute must. For example, banks subject to the July 1, 2013 deadline should establish their teams, develop their process and select their advisors no later than September 2012 to allow for sufficient execution time.
3. Develop Integrative Strategies. The resolution plan team should hold a series of meetings with key front office leadership to learn from each other and develop integrative strategies that take into account the likely effects of insolvency proceedings on ongoing business operations. Initially, the team will educate others about resolution planning, while the front office team will educate the resolution plan team about their particular business functions. This should naturally evolve into an ongoing dialog to identify concerns and refine strategies as the process unfolds.
4. Frame Fundamental Assumptions. A company must identify the fundamental assumptions underlying its plan. Through such assumptions, a company may focus the project by reducing the number of variables and mitigating those beyond its control. Initial assumptions should be revisited at critical points throughout the process to ensure they remain valid as the resolution plan is developed.
5. Identify Operational and Financial Commonalities. Many business lines and operations have common assumptions, obstacles, interconnections and strategies. It is incumbent on the resolution plan team to identify these and develop a consistent approach.
6. Recognize Practical Limitations. The resolution planning process simply cannot eliminate all systemic risk or provide a solution for every issue that may potentially cause a disruption to U.S. financial markets. When an impediment to resolvability needs to be addressed, the team should work diligently to find one or more practical mitigating measures (as opposed to an “ideal” solution). Regulators recognize that there may be issues that cannot be solved at this point in time, including some outside of any one bank’s control, but they expect these issues to be identified nonetheless.
7. Facilitate Dynamic Discussions. As resolution planning is still in its formative years, the plan may change and evolve, requiring lots of discussion and attention. It will evolve through both internal dialog (i.e., discussions between the resolution plan team and the front office) and external dialog (i.e., discussions between the firm and regulators), as well as regulators’ review of resolution plans. These discussions are important to ensure that everyone, including the front office, remains consistent and current on evolving regulatory expectations.
The upside is there are no “right” answers and no prescribed solutions to any issue. Further, at least for the first round of resolution plan filers, regulators have suggested that no initial resolution plans will fail.
8. Blend Disclosure with Advocacy. A resolution plan is necessarily part disclosure and part advocacy. Though banks are required to demonstrate that they are resolvable, a financial institution can also use its resolution plan to advocate preferred solutions to horizon issues and educate the regulators about their operations to facilitate future discussions on M&A transactions and new product lines.
9. Reflect and Improve. Firms should embrace resolution planning as a means to examine all aspects of the operation and, by doing so, identify means to improve efficiencies and reduce operational costs throughout the organization. This “forced introspection” can be equally useful to optimize risk management strategies on an entity-wide basis as different scenarios are considered.
Resolution planning is a new frontier for banks and regulators alike. Poor planning and execution can easily cause the process to become unduly burdensome, whereas advanced planning, lots of introspection, and the strategic blend of disclosure and advocacy can result in an efficient process that yields benefits to the institution beyond resolution planning.