Earlier this month, the Federal Deposit Insurance Corporation (FDIC) issued a report[1] describing how and when the agency would exercise its authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in connection with the resolution of a U.S. global systemically important banking organization (GSIB) or other systemically important financial company. The FDIC Report, which comes just over a year after the failures of SVB, Signature Bank, and Credit Suisse, is the most comprehensive description to date of the FDIC’s framework for resolving large, complex financial institutions under Title II. While it contains relatively little new information, the FDIC Report—together with accompanying remarks from FDIC Chairman Martin Gruenberg and senior FDIC staff[2]—reiterates key FDIC policy priorities relating to the resolvability of large financial institutions, including the FDIC’s desire to enhance loss-absorbing capacity through long-term debt (LTD) requirements and preference for single-point-of-entry (SPOE) resolution strategies.
Below, we highlight several of these key priorities, which are likely to remain a focus for the FDIC through at least the remainder of 2024, against the backdrop of the broader U.S. resolution framework for large financial institutions.
The Resolution Framework for Large U.S. Financial Institutions
The U.S. resolution framework for large financial institutions is relatively complex, with multiple potential avenues for resolution depending on the entities involved and the nature of the resolution, as well as different types of resolution planning requirements. The centerpiece of the framework is Title I of the Dodd-Frank Act, which requires domestic and foreign banking organizations (FBOs) with over $250 billion in total consolidated assets and certain domestic and foreign firms between $100 billion and $250 billion in total consolidated assets based on tailoring factors to regularly prepare resolution plans, sometimes referred to as “living wills,” demonstrating how they could be resolved under the U.S. Bankruptcy Code without serious adverse effects on U.S. financial stability or taxpayer support.[3] The U.S. GSIBs are required to file these plans with the Federal Reserve and FDIC for review biennially (alternating between full and targeted plans), whereas smaller firms and FBOs must file triennially. Firms making triennial submissions are further subdivided into “triennial full filers”—Category II and III firms under the Enhanced Prudential Standards rules—that must alternate between submitting full and targeted resolution plans, and “triennial reduced filers”—other FBOs with $250 billion or more in global assets—that submit less detailed plans. Insured depository institutions (IDIs) with $50 billion or more in assets are also subject to an IDI-level resolution planning requirement with the FDIC to file plans addressing how the institution would be resolved under the Federal Deposit Insurance Act (FDIA).[4]
Title II of the Dodd-Frank Act supplements, and is considered a “back-up” option to, the Title I framework by granting the FDIC resolution authority—similar to the authority it has with respect to IDIs under the FDIA—to resolve systemically important financial companies. To invoke Title II, the relevant authorities must determine that the failure of the financial company and its resolution under an otherwise applicable resolution regime, such as under the Bankruptcy Code, would have serious adverse effects on financial stability in the United States.[5] The FDIC Report is the most comprehensive description to date of how the FDIC expects this authority to be exercised and what a Title II resolution would likely entail. Below is a brief overview of how the FDIC has described the Title II process:
- The “Three Keys.” The FDIC would need to receive authorization to administer a Title II resolution through the “three keys” process. In most cases, this would require recommendations from two-thirds of the FDIC’s board of directors, as well as two-thirds of the Federal Reserve Board, followed by approval from the Secretary of the Treasury in consultation with the President.[6] The recommendations and Secretary’s authorization are required to address certain criteria—including a determination that the company is “in default or in danger of default” and explanation of why an insolvency under the Bankruptcy Code is not appropriate—and the subject firm would be entitled to an expedited and limited, 24-hour judicial review process if it chose to challenge the application of Title II.[7]
- Bridge Financial Company for SPOE Strategy. The FDIC Report indicates that the FDIC expects it would adopt an SPOE strategy for the Title II resolution of a U.S. GSIB, although the Report notes that many of the processes described in it would also support resolution of other types of systemically important financial companies. Under this approach, the FDIC would establish a bridge financial company once it has been appointed as receiver and would transfer to the bridge financial company substantially all the assets of the failed holding company, likely including the investments in and loans to the group’s subsidiaries as well as cash and securities held by the holding company. Secured liabilities, together with accompanying collateral, and certain obligations to trade creditors needed to continue the smooth functioning of the bridge financial company may also be transferred to the bridge financial company, while unsecured liabilities and shareholders’ equity would be retained in the receivership.
- FDIC Oversight of Bridge and Claims Process. The FDIC would then install a new board for the bridge financial company, replace the existing senior management with new executives, and continue to retain oversight over the bridge and control over its major strategic decisions. The FDIC would also manage an administrative claims process for the receivership that would allocate losses to the shareholders and creditors of the failed company.
- Exit from Resolution. Ultimately, the bridge financial company would be terminated through a public sale, merger, or securities-for-claims exchange that would establish a successor company or companies that would be owned by the former claimants to the receivership.
Key Takeaways
While the FDIC Report is largely descriptive of the agency’s existing plans for execution of its Title II authority, several areas are worth highlighting because of their impact on regulated entities’ ongoing obligations under Title I and related regulatory regimes:
- LTD requirements are a priority for the FDIC. Last August, the FDIC, Federal Reserve, and Office of the Comptroller of the Currency (OCC) jointly proposed to require certain[8] bank holding companies, savings and loan holding companies, and insured depository institutions with $100 billion or more in assets to issue minimum eligible LTD. The proposal was focused on augmenting loss-absorbing capacity particularly for large regional banks to increase the likelihood of an orderly resolution, whether of the holding company under the Bankruptcy Code or the insured depository institution subsidiary under the FDIA, and to minimize costs to the Deposit Insurance Fund in the latter case. In the preamble to the proposal and in statements made by Chairman Gruenberg and senior FDIC staff, the FDIC has continued to emphasize the importance of LTD in ensuring sufficient private sector capacity to absorb losses in resolution and facilitate market discipline over LTD issuers. Although the FDIC Report is focused on the FDIC’s Title II resolution authority with respect to GSIBs and not on resolution of large regional banks under the Bankruptcy Code or FDIA, the Report solidifies the FDIC’s continued emphasis on LTD’s role in facilitating orderly resolution for all large banking organizations. We expect the FDIC, Federal Reserve and OCC to eventually finalize the LTD proposal, but the precise timing is uncertain.
- The FDIC continues to lean into SPOE resolution. Contemporaneous with the agencies’ LTD proposal, the FDIC and Federal Reserve also proposed guidance outlining their expectations for holding company resolution plans submitted by domestic and foreign triennial full filers.[9] The proposed guidance included extensive expectations for triennial full filers that adopt SPOE resolution strategies, although the agencies recognized that no domestic filers in this category have currently adopted an SPOE strategy, opting instead for multiple-point-of-entry (MPOE) strategies. The guidance contained a less extensive discussion of MPOE strategies, which has raised questions about whether the FDIC and Federal Reserve would prefer that some or all triennial full filers adopt the SPOE approach, despite professing that they have no preferred resolution strategy for triennial full filers. As FDIC Vice Chairman Travis Hill noted in his dissenting statement on the resolution planning guidance, the fact that the agencies’ LTD proposal would require Category II and III firms to issue holding company level-LTD and included “clean holding company” requirements—important components of an SPOE strategy—does little to rebut suspicions that the agencies may have a preference for SPOE. The FDIC Report and accompanying remarks continue the agencies’ muddled message but may give some comfort to U.S. regional banks worried about a thumb on the scale. While these materials repeatedly emphasize the importance of LTD and clean holding company requirements in facilitating orderly resolutions, the FDIC Report specifically notes that large regional banking organizations are “best suited for [a] resolution in which the IDI is placed into receivership under the Federal Deposit Insurance Act and the holding company is placed into bankruptcy, as opposed to an SPOE resolution under Title II.”
- The Title II resolution mechanism remains untested. While the FDIC Report is the clearest description to date of how the FDIC would execute its Title II authorities, that very clarity underscores just how much is left to be fleshed out. For example, the FDIC Report contains detailed descriptions of the legal requirements and formal processes for invoking Title II and the factors, such as the relevant institution’s capital and liquidity profile, that the FDIC expects to consider in making recommendations regarding whether to invoke Title II. But the FDIC Report does not—and cannot—address the likelihood that policymakers would be willing to invoke this option at the relevant agencies’ recommendation. The joint invocation of the FDIA’s systemic risk exception by the FDIC, Federal Reserve, and Treasury last spring suggests that it is at least possible, as the systemic risk exception generally employes the same “three keys” process as Title II. But because the process requires involvement of the Treasury Secretary and consultation with the President, any ultimate decision to invoke Title II would inherently be political. Further, although the Report describes significant advancements made in Title I resolution planning by U.S. GSIBs, such as the adoption of internal escalation triggers tied to capital and liquidity needs and other governance mechanisms, it does not address how a Title II process might interact with the key features of those plans.
The FDIC will likely continue to be active in this area. As mentioned above, the agencies have yet to finalize the LTD proposal and proposed resolution planning guidance, and the FDIC’s proposed revisions to its depository institution-level resolution planning rule are also pending. The FDIC also will likely continue working to enhance its Title II resolution framework and capabilities—a recent report by the FDIC’s Inspector General included 17 recommendations for enhancing the FDIC’s ability to execute its Title II authorities if needed, and the FDIC has indicated it will implement these recommendations over the remainder of 2024 and 2025.
We will continue to monitor developments and provide updates as appropriate.
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[1] Federal Deposit Insurance Corporation, Overview of Resolution Under Title II of the Dodd-Frank Act (Apr. 2024) (FDIC Report).
[2] Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation, Remarks at the Peterson Institute for International Economics: The Orderly Resolution of Global Systemically Important Banks (Apr. 10, 2024). The Peterson Institute has released a recording of the event, and panel interviews with Chairman Gruenberg and FDIC resolution staff begin at approximately 47 and 83 minutes, respectively.
[3] This regime also applies to nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve. While there are currently no such companies, recent FSOC guidance has raised speculation that the FSOC may expand this category (see our blog post, here).
[4] IDI plan submission requirements were paused from November 2018 in advance of anticipated revisions to the IDI resolution plan rule and were resumed in January 2021 only with respect to IDIs with $100 billion or more in assets. Press Release, Federal Deposit Insurance Corporation, FDIC Announces Lifting IDI Plan Moratorium (Jan. 19, 2021). IDIs with between $50 and $100 billion in assets therefore have not recently been required to file IDI resolution plans, although the FDIC has proposed to reinstate biennial “informational filings” for such firms as part of proposed revisions to the IDI resolution planning rule. Federal Deposit Insurance Corporation, Resolution Plans Required for Insured Depository Institutions With $100 Billion or More in Total Assets; Informational Filings Required for Insured Depository Institutions With at Least $50 Billion But Less Than $100 Billion in Total Assets, 88 Fed. Reg. 64579 (Sept. 19, 2023).
[5] For a comparison of the respective resolution regimes, see FDIC Report, at 4.
[6] Title II resolution of a broker-dealer would require approval by two-thirds of the commissioners of the Securities and Exchange Commission rather than the FDIC’s board, while Title II resolution of an insurance firm would require an affirmation by the Federal Insurance Office’s Director rather than FDIC board approval. In both cases, however, consultation with the FDIC would be required.
[7] See 12 U.S.C. § 5383.
[8] U.S. GSIBs and intermediate holding companies of foreign GSIBs are already subject to total loss-absorbing capacity and LTD requirements.
[9] Biennial filers—the U.S. GSIBs—are covered by separate existing guidance. Certain large FBOs that are triennial full filers are also covered by existing guidance, but the new proposed guidance would replace this guidance if adopted as proposed.
