Financial Services Spotlight

Potential Lessons for Third Wave Resolution Plan Filers - Resolution Plan Comments by the Fed and FDIC on the Second Wave’s Plans

Posted by Roy Andersen on Mar 24, 2017 12:00:00 AM

Up to this point, the regulators in charge of the Resolution Plan process have focused only on the mega banks and have left the second and third wave filers alone. However, today, the Fed published comment letters on 16 second wave (banks with between $100 and $250 billion in nonbank assets) resolution plans that were filed in 2015 and some of the comments may provide suggestions on the types of steps that third wave filers could consider in order to demonstrate proactive resolution planning. 


Resolution Plan Concern: The regulators have stressed that the planning process must explain how capital and liquidity would be affected for material entities and whether operational needs will be met. Responding to this concern requires a description of how intraday funding flows among material entities will occur. The regulators assume the likelihood that there would be some diminution of the firm's liquidity buffer in the days or weeks prior to the resolution process being initiated by the primary federal or state regulator.

Possible actions: For third wave filers this may trigger some consideration of how a branch would continue to obtain funding needed to continue critical operations needed to execute the resolution strategy. In this regard, a branch may consider minimum operating liquidity and peak funding needs, intraday liquidity requirements, operating expenses and working capital needs to maintain stable operations at the outset of a resolution scenario.

Shared and Outsourced Services

Resolution Plan Concern: Many third wave filers rely on affiliates and third-party vendors to provide necessary corporate and front and back office services. The regulators have noted that many key service contracts with affiliates and third-party vendors contain provisions that would allow counterparties to terminate services, or prevent assigning contractual rights to services in the event of resolution. In addition, where services are shared by affiliates, no formal agreements or contracts are in place to document the services being relied on by affiliates.

Possible actions: Third wave filers may consider potential mitigants to these contract issues and develop and implement project plans to remediate these concerns and avoid disruption of the provision of services needed to ensure continuity in resolution. Branches could identify all shared and outsourced services that support critical operations and map how and where these services support key business lines. Such planning would consider the risks that services provided by affiliates or third parties may be interrupted during resolution.

Key Personnel Retention

Resolution Plan Concern: The regulators are concerned that key personnel will leave during the process of resolution and this may adversely affect the ability of the regulators to oversee a successful resolution. The loss of key personnel may cause a diminution of asset values in the resolution process. 

Possible actions: Third wave filers may consider development of a HR Staff Retention Playbook including actions the firm has taken or plans to take, if any, to address the risk that key employees may depart during its resolution.

Take Aways

As we have discussed, each year the Fed and FDIC ask the third wave filers to outline if, and how, they have tried to improve their plans. Such improvement actions are not mandated by the regulations and most banks that I am familiar with do not take any actions to improve the plans from the initial filings. I am not aware of any adverse actions taken by the regulators on this score.  If there is any appetite to take some steps to show resolution planning is being seriously considered then these areas might be worth consideration.

About the Spotlight

The Financial Services Spotlight examines the regulatory and technology developments impacting banks, asset managers and other financial services providers—where challenges meet opportunities.


Meet the Authors

Roy C. Andersen, of counsel in Sullivan & Worcester's New York office, is a member of the Corporate Department. Mr. Andersen focuses on bank regulatory and compliance matters, including international banks and their branches and agencies in New York.

Joel Telpner, partner in the firm's New York office, is a seasoned advisor, strategist and problem solver. Mr. Telpner brings more than 30 years of legal experience in a career that includes time as an AmLaw 100 partner, the former U.S. general counsel of a global financial institution, and a venture capitalist. He is recognized for his ability to deftly manage complex financial transactions, especially those involving sophisticated structured finance and derivatives matters and has an extensive and unique combination of transactional and regulatory experience.

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