Discussion on the Current State of Resolution Planning;
Remarks by
Jeremiah O. Norton, Member,
Board of Directors of Federal Deposit Insurance Corporation
to the
American Bankers Association,
New Orleans, Louisiana
October 21, 2013
Introduction
Thank you for inviting me to be with you at the annual convention of the American
Bankers Association (ABA). As evidenced by the long list of guests who have joined
your meetings in years past, the ABA provides an important forum to discuss the state
of the banking industry, as well as the different issues facing financial institutions and
the broader economy. Today I would like to share some perspectives on the state of
resolution planning.
In many respects, achieving a credible and workable framework for resolving large and
complex financial institutions (LCFI)1 would be the pinnacle reform accomplishment in
the wake of the 2008 financial crisis. Most banking organizations do not fall in the
category of large and complex financial institutions; however, the policy implications of
resolvability filter throughout the financial system. While the decision-making process in
Washington on how to resolve LCFIs might have direct effects on only a small number
of firms, the stakes of the outcome reach well beyond LCFIs. In other words, I believe it
could be difficult for the financial system at large to reach a regulatory equilibrium until
there is consensus that firms of all sizes are subject not only to appropriate supervision,
but also to market discipline from equity holders, counterparties, and creditors.
Beginning in 2008, policymakers began calling for a legal framework to resolve LCFIs in
an orderly way.2 The massive and unprecedented assistance that the U.S. Government
provided to firms in 2008 led the Congress to address the issue of resolvability when it
debated, drafted, and enacted the Dodd-Frank Act (Dodd-Frank) of 2010. The
Congress created two paths for resolution. The primary path is a bankruptcy process
under Title I of the Act, and the other path is the use of a new Orderly Liquidation
Authority (OLA) under Title II of the Act. Progress is being made to address
resolvability. However, policymakers still need to consider and address a number of
key issues.
Basic Tenets of Title I Resolution Planning
Title I of Dodd-Frank includes a number of provisions to further financial stability through
capital regulation, enhanced prudential standards, stress testing, creation of the
Financial Stability Oversight Council (FSOC), and resolution planning
requirements. With respect to resolution planning, the Congress mandated that large
bank holding companies and foreign banking organizations with branches or agencies
in the U.S. submit resolution plans (or living wills) if their consolidated assets are greater
Remarks by
Jeremiah O. Norton, Member,
Board of Directors of Federal Deposit Insurance Corporation
to the
American Bankers Association,
New Orleans, Louisiana
October 21, 2013
Introduction
Thank you for inviting me to be with you at the annual convention of the American
Bankers Association (ABA). As evidenced by the long list of guests who have joined
your meetings in years past, the ABA provides an important forum to discuss the state
of the banking industry, as well as the different issues facing financial institutions and
the broader economy. Today I would like to share some perspectives on the state of
resolution planning.
In many respects, achieving a credible and workable framework for resolving large and
complex financial institutions (LCFI)1 would be the pinnacle reform accomplishment in
the wake of the 2008 financial crisis. Most banking organizations do not fall in the
category of large and complex financial institutions; however, the policy implications of
resolvability filter throughout the financial system. While the decision-making process in
Washington on how to resolve LCFIs might have direct effects on only a small number
of firms, the stakes of the outcome reach well beyond LCFIs. In other words, I believe it
could be difficult for the financial system at large to reach a regulatory equilibrium until
there is consensus that firms of all sizes are subject not only to appropriate supervision,
but also to market discipline from equity holders, counterparties, and creditors.
Beginning in 2008, policymakers began calling for a legal framework to resolve LCFIs in
an orderly way.2 The massive and unprecedented assistance that the U.S. Government
provided to firms in 2008 led the Congress to address the issue of resolvability when it
debated, drafted, and enacted the Dodd-Frank Act (Dodd-Frank) of 2010. The
Congress created two paths for resolution. The primary path is a bankruptcy process
under Title I of the Act, and the other path is the use of a new Orderly Liquidation
Authority (OLA) under Title II of the Act. Progress is being made to address
resolvability. However, policymakers still need to consider and address a number of
key issues.
Basic Tenets of Title I Resolution Planning
Title I of Dodd-Frank includes a number of provisions to further financial stability through
capital regulation, enhanced prudential standards, stress testing, creation of the
Financial Stability Oversight Council (FSOC), and resolution planning
requirements. With respect to resolution planning, the Congress mandated that large
bank holding companies and foreign banking organizations with branches or agencies
in the U.S. submit resolution plans (or living wills) if their consolidated assets are greater
than or equal to $50 billion.3 These living wills must report the “plan of such company
for rapid and orderly resolution in the event of material financial distress or failure.”4 The
plans must include, among other items, a description of the ownership structure, assets,
liabilities, and contractual obligations of each company as well as an identification of
major counterparties.5
The statute requires the Federal Reserve and the FDIC (the Agencies) to review the
resolution plans.6 In the event that the Agencies jointly determine that a plan is not
credible or would not facilitate an orderly bankruptcy process, the law requires the
Agencies to notify the company of its plan’s deficiencies. Should such a notification
occur, the company must resubmit its plan with revisions demonstrating that it can be
resolved in an orderly way in a bankruptcy proceeding.7 If the firm fails to resubmit a
satisfactory plan, then the Agencies may impose enhanced supervisory measures8 or
order divestiture two years after the measures are imposed. 9
Living Wills Considerations
As we now are moving beyond the nascent stages of the living wills process, it is
important to evaluate how Title I will be used to achieve Dodd-Frank’s objective to make
firms resolvable under bankruptcy. One potential challenge arises out of the statutory
text. The threshold for determining whether a living will is credible or would facilitate an
orderly bankruptcy is not well defined. Neither the statute nor the Agencies’
implementing regulation defines “credible.” Likewise, the statute does not provide
specificity as to how the Agencies should determine whether a plan is credible or
deficient. In response to comments received during the rulemaking process, the
Agencies provided a definition of “rapid and orderly resolution.”10 This definition requires
that the liquidation or reorganization of the covered company can be accomplished
within a “reasonable period of time and in a manner that substantially mitigates the risk
that the failure of the covered company would have serious adverse effects on the
financial stability of the U.S.”11 However, what constitutes a “reasonable period of time”
and what is required to satisfy the standard of “substantially mitigates” is not laid out
clearly.
The decision by the Agencies to preserve definitional flexibility could have implications
on the overall effectiveness of Title I. The optimal outcome of the living wills process
would result in each firm being resolvable under an orderly bankruptcy
proceeding. Arguably, this outcome would obviate the need for a number of other
current and future regulatory initiatives. Absent agreement by the Agencies that each
firm is resolvable in an orderly bankruptcy, policymakers might exercise varying degrees
of discretion and take one of three paths in the living wills process:
1. Policymakers could argue that the statutory text and clear intent of the law call for
firms either to resubmit living wills that would result in an orderly bankruptcy or
ultimately to face new regulatory restrictions and possible divestitures within a few
years’ time;
for rapid and orderly resolution in the event of material financial distress or failure.”4 The
plans must include, among other items, a description of the ownership structure, assets,
liabilities, and contractual obligations of each company as well as an identification of
major counterparties.5
The statute requires the Federal Reserve and the FDIC (the Agencies) to review the
resolution plans.6 In the event that the Agencies jointly determine that a plan is not
credible or would not facilitate an orderly bankruptcy process, the law requires the
Agencies to notify the company of its plan’s deficiencies. Should such a notification
occur, the company must resubmit its plan with revisions demonstrating that it can be
resolved in an orderly way in a bankruptcy proceeding.7 If the firm fails to resubmit a
satisfactory plan, then the Agencies may impose enhanced supervisory measures8 or
order divestiture two years after the measures are imposed. 9
Living Wills Considerations
As we now are moving beyond the nascent stages of the living wills process, it is
important to evaluate how Title I will be used to achieve Dodd-Frank’s objective to make
firms resolvable under bankruptcy. One potential challenge arises out of the statutory
text. The threshold for determining whether a living will is credible or would facilitate an
orderly bankruptcy is not well defined. Neither the statute nor the Agencies’
implementing regulation defines “credible.” Likewise, the statute does not provide
specificity as to how the Agencies should determine whether a plan is credible or
deficient. In response to comments received during the rulemaking process, the
Agencies provided a definition of “rapid and orderly resolution.”10 This definition requires
that the liquidation or reorganization of the covered company can be accomplished
within a “reasonable period of time and in a manner that substantially mitigates the risk
that the failure of the covered company would have serious adverse effects on the
financial stability of the U.S.”11 However, what constitutes a “reasonable period of time”
and what is required to satisfy the standard of “substantially mitigates” is not laid out
clearly.
The decision by the Agencies to preserve definitional flexibility could have implications
on the overall effectiveness of Title I. The optimal outcome of the living wills process
would result in each firm being resolvable under an orderly bankruptcy
proceeding. Arguably, this outcome would obviate the need for a number of other
current and future regulatory initiatives. Absent agreement by the Agencies that each
firm is resolvable in an orderly bankruptcy, policymakers might exercise varying degrees
of discretion and take one of three paths in the living wills process:
1. Policymakers could argue that the statutory text and clear intent of the law call for
firms either to resubmit living wills that would result in an orderly bankruptcy or
ultimately to face new regulatory restrictions and possible divestitures within a few
years’ time;