The Federal Deposit Insurance Corporation has issued new guidance and requirements for the resolution plans federally insured financial institutions holding more than $50 billion in assets must periodically submit.
These plans are required by an FDIC rule approved in January 2012, as mandated by the Dodd-Frank Act. It requires covered banks, currently 36 meet the criteria, to submit resolution plans that would enable the FDIC, as a receiver, to wind-down their institution in an orderly manner that enables “prompt access of insured deposits; maximizes the return from the failed institution's assets; and minimizes losses realized by creditors and the Deposit Insurance Fund.”
Banks must provide a fully developed discussion and analysis of a range of realistic resolution strategies, including at least one approach for the separation and sale of its deposit franchise, core business lines, and/or major assets to multiple acquirers. It should also include a secondary strategy for a liquidation of the firm and a payout of insured deposits.
The new guidance, which applies to 2015 submissions, include direction regarding what needs to be discussed in a fully developed resolution strategy and an accompanying cost analysis.
Among the matters discussed:
A “multiple acquirer strategy” may be accomplished through a combination of transactions including, purchase and assumption, initial public offering of securities, and liquidation. The FDIC expects that at least one strategy will involve the recapitalization of a portion of the institution through single or multiple IPO transactions.IPO transactions should, in aggregate, range from 25 to 50 percent of assets of the covered institution at the time of failure.
A bank can demonstrate that a strategy is reasonable and cost-effective by presenting a range of realistic, potential resolution strategies. A cost analysis should accompany each strategy and a comparative analysis across the strategies should also be provided.
Strategies should discuss any factors that could impair their success, including current legal and organizational structure and operational capabilities; operational or structural difficulties in separating business lines; challenges to ensuring continuity of services, such as IT systems or accounting; and challenges to marketing the identified components to be sold.
Banks may consult with the FDIC if a strategy to recapitalize a materially significant portion of the institution through one or more IPOs is not appropriate given its size, complexity, business model, or other factors.
When preparing a cost analysis, the estimated cost of liquidation should be taken into account. Liquidation costs include paying the insured depositors, administering the receivership, and FDIC-incurred expenses for marketing and valuing the assets, balanced against the proceeds from the sale or disposition of assets over the course of the receivership.
The cost analysis should factor in the premium expected from the sale of the deposit franchise after a bridge bank has been established versus the expected premium for the deposit franchise in an immediate sale. Other factors include the estimated market value of business lines, subsidiaries, and assets to be sold.
The FDIC also identifies “significant obstacles to an orderly and least costly resolution.” Each of these should be discussed in the resolution plan, along with actions or steps it has taken, or proposes to take, to mitigate them.These can include the loss of key personnel, access to facilities, and/or intellectual property; failure of affiliates or third parties to perform under service level agreements; liquidation of a parent, affiliate, subsidiary or third party that negatively affects the FDIC receivership’s or bridge bank’s operations; or a counterparty exercising contract repudiation rights.
The complete guidance can be found here.