Resolution Planning: Lessons Learned

apple-a-day.jpgThis 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. 

Living Wills for Large Banks and Systemically Important Institutions: a Blueprint


Each U.S. bank holding company and foreign banking organization with more than $50 billion in consolidated assets and each nonbank financial institution deemed systemically important by the Financial Stability Oversight Council must submit a resolution plan, or “living will” for the “rapid and orderly resolution in the event of material financial distress or failure.” A likely deadline is July 21, 2012.

Each institution required to submit a resolution plan also must submit, on a periodic basis, a credit exposure report. These reports will be critical in the assessment of systemic risk.

The Federal Reserve and Federal Deposit Insurance Corp. have proposed rules with more detailed plan requirements and specifics on credit exposure reports. A final rule is due by January 21, 2012.

The plan must explain:

  • The structures and procedures in place to protect an insured depository institution subsidiary from the risks arising from activities of any nonbank affiliate
  • Ownership structure, assets, liabilities, and contractual obligations
  • Cross-guarantees tied to different securities, major counterparties, and a process for determining to whom the collateral of the company is pledged
  • Reorganization or liquidation in bankruptcy

The plan should anticipate the needs and duties of the Federal Reserve and the FDIC and support two functions:

  • Ongoing supervision

    • Identify material exposures to major counterparties
    • Describe the riskier components of the institution
    • Identify market and liquidity risks
    • Gather information to perform horizontal supervision
    • Develop stress scenarios and potential solutions
  • Resolution planning

    • Describe a hypothetical Chapter 7 and Chapter 11 proceeding
    • Consider which businesses to market pre-liquidation
    • Analyze the usefulness of a bridge bank
    • Assess short-term liquidity needs
    • Identify and prepare for impact of failure on other institutions



  • Appoint full-time living will team
  • Establish a reporting and oversight structure that includes input from enterprise risk management, treasury and finance, and legal
  • Designate board members to monitor process
  • Organize data collection

Major Tasks
Strategic analysis

  • Identify likely stressors
  • Analyze failure of particular entities, and that of the whole institution
  • Assess private sector solutions
  • Devise bankruptcy alternatives
  • Establish methods for protection of the bank

Corporate governance structure for resolution planning

  • Develop central planning function headed by senior management
  • Coordinate communications and reporting to board of directors

Overall organizational structure

  • Describe material entities and core business lines
  • Explain inter-affiliate relationships, including risk transfers
  • Provide financials, including on- and off-balance sheet items 

Management information systems

  • Develop a process for efficient and timely data gathering
  • Determine who will maintain access to specific data

External risks

  • Describe capital and liquidity sources
  • Identify exposures to major counterparties, including short-term funding, derivatives and other “qualified financial contracts,” and collateral arrangements
  • Determine the effect of a failure of a major counterparty

Internal risks

  • Analyze reliance of one affiliate on another for capital, funding, or services
  • Identify cross-guarantees


 Bank Regulatory

  • Does the plan sufficiently address management of the institution’s risks, especially liquidity, counterparty, and market risks?
  • How would other supervisory tools affect execution of the plan?
  • How will emerging regulations affect the operations of the institution?
  • Should any restructuring be considered?
  • How will cross-border operations be addressed in the plan?

Bankruptcy and Restructuring

  • How would the institution be liquidated under Chapter 7 or restructured under Chapter 11 of the U.S. Bankruptcy Code?
  • What authority and duties would current directors and officers have?
  • How would counterparty rights in bankruptcy differ from those under Title II of the Dodd-Frank Act?
  • How does the institution avoid a replay of the Lehman bankruptcy?
  • What should the plan include in order to minimize the likelihood that Title II’s Orderly Liquidation Authority will apply?

Capital Markets

  • What are the creditor relationships underlying outstanding debt instruments?
  • Which instruments are realistically available to recapitalize the institution?

Corporate Governance

  • What duties do directors and officers owe in preparing the plan?
  • What duties apply when an institution is failing?


  • What are the material counterparty relationships?
  • Are there unusual considerations in unwinding particular positions?
  • What law governs each of the trading agreements and any credit support arrangements?
  • To what extent are close-out and netting provisions enforceable in the relevant jurisdictions?


  • What is the effect of a restructuring on deferred tax assets?
  • How do intercompany tax sharing agreements work in stress scenarios?

Technology Transactions

  • Do technology contracts provide maximum protection in a liquidation or restructuring?

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