United States: Lessons Learned and Lower Thresholds

In the first article of resolution week, we focus on the United States where practitioners might be excused for getting lost in all of the papers that the regulators have recently published. Here is our summary.

FDIC Chair highlights "Lessons Learned" from 2023 bank failures

In the aftermath of the failures of Silicon Valley Bank (SVB), Signature Bank and First Republic Bank of California in 2023, Federal Deposit Insurance Corporation (FDIC) Chair Martin J. Gruenberg in May this year gave a speech in which he highlighted lessons drawn as well as the steps the FDIC has taken since to avoid further bank failures. 

Among the actions that the U.S. took to address the 2023 bank failures was the invocation of the systemic risk exception, an extraordinary measure that the authorities do not favor because it is an exception to the requirement that the FDIC resolve failed insured depository institutions (IDIs) in the manner least costly to the deposit insurance fund administered by the FDIC. 

Chair Gruenberg said that the bank failures "focused [the FDIC's] attention on the need for meaningful action to improve the likelihood of an orderly resolution of a large regional bank under the FDI Act without the expectation of invoking the systemic risk exception." Steps being taken include a long-term debt requirement, changing the capital treatment of unrealized losses on available for sale securities, treatment of uninsured deposits in the context of liquidity risk management purposes, reforming the system of deposit insurance, and enhanced resolution plan requirements for large IDIs. 

Some of the actions Chair Gruenberg described in the May 2024 speech had already been formally proposed before the 2023 bank failures. All of the measures he described remain under consideration, other than the enhanced resolution plan requirement for large banks. In addition to the large IDI resolution plan enhancements, the FDIC and the Federal Reserve Board have issued joint guidance to certain groups of domestic and non-U.S. institutions regarding resolution plan requirements that are mandated by Section 165(d) of the Dodd-Frank Act and generally apply to large bank holding companies. These are separate from the requirements that apply to IDI resolution plans. These initiatives, as well as related recovery planning guidance issued by the Office of the Comptroller of the Currency (the OCC), which supervises federally chartered (national) banks in the United States, are described below.

Resolution Plans for Insured Depository Institutions (IDI Plans)

The FDIC would act as the receiver in the event of a receivership of a large IDI. The FDIC originally adopted a resolution plan requirement for large IDIs in 2012 ("Resolution plans required for insured depository institutions with $50 billion or more in total assets") in order to support the FDIC's resolution readiness in the event of material distress of the IDI.  The regulation addressed the content and timing of full resolution submissions, as well as interim supplements to those submissions provided to the FDIC. The regulation originally applied to IDIs with $50 billion or more in total assets. In 2019, the FDIC adopted a moratorium on the filing requirement. In 2021, the FDIC lifted the moratorium on IDIs with $100 billion or more in total assets. With this 2024 rule, which was published in the Federal Register on July 9, the FDIC is further lifting the moratorium by imposing an informational filing requirement on IDIs with $50 billion or more in total assets.  The rule also amends the original rule to apply lessons learned in the intervening years, including the 2023 regional bank failures.   

The July 2024 final rule incorporates enhancements along the lines that Chair Gruenberg had previously outlined. Under the rule adopted by the FDIC, IDIs with $100 billion or more in total assets must submit resolution plans, and IDIs with at least $50 billion but less than $100 billion in total assets must submit informational filings. As a practical matter, the informational filings must include a significant amount of the information that is required for a resolution plan, and all institutions will need to devote significant resources to the preparation of such plans and informational filings. 

For IDIs with total assets of $100 billion or more, the final rule enhances how the credibility of full resolution submissions will be assessed, expands expectations regarding engagement and capabilities testing, and explains expectations regarding the FDIC's review, feedback, and enforcement of IDIs' compliance with the rule. Resolution plans for these IDIs must address 27 separate elements (the last of which is a catch-all as to any other factors that may impede the resolution of the IDI) and must incorporate an identified strategy that would describe the resolution from the point of failure through the sale or disposition of the institution's franchise. In particular, resolution plans from this category of IDI must address the establishment and stabilization of a bridge depository institution (BDI) and an exit strategy from the BDI, such as a multiple acquirer exit; an "orderly wind down of certain business lines and asset sales;" a "restructuring and subsequent initial public offering or other capital markets transaction;" "or another exit strategy appropriate to the size, structure, and complexity of the [institution]." A permitted identified strategy would not include a closing weekend sale of the IDI franchise to one or more acquirers, which is generally how smaller IDIs are resolved as a practical matter. The plan must also include information that will assist the FDIC in making a least cost resolution determination. 

Overall, these changes are expected to involve enhanced ongoing review and oversight of an IDI's resolution-related capabilities. Significantly, the IDI must give the FDIC access to personnel relevant to the resolution plan, and engagement between the IDI and the FDIC may be required at any time regarding the plan. The FDIC may also require the IDI to demonstrate the IDI's capabilities required by or described in the resolution plan, among which is the ability to establish a virtual data room that could be used in the sale of the IDI or its component parts. 

As noted above, for IDIs with total assets of $50 billion or more but less than $100 billion (of which there are twelve), the final rule imposes an "informational filing," requirement. Much of the information required for larger IDIs is also required for the smaller IDIs. In addition, the informational filings must include public and confidential sections.  As with full filers, IDI personnel must be available for engagement with FDIC personal at any time, including capabilities testing and the establishment of a virtual data room. However, among other things, it does not require development of an identified strategy for resolution nor the demonstration of capabilities necessary to produce valuations related to the FDIC's least-cost determinations. 

With the exception of IDI affiliates of G-SIBs, which will remain on a biennial filing cycle, the final rule specifies a three-year filing cycle both for resolution plan and informational filing submissions. IDIs are also required to submit interim supplements each year in which a resolution plan or informational filing is not required. In a financial institution letter issued on August 8, 2024, the FDIC set forth the submission deadlines for various groups of IDIs under the rule. 

The rule goes into effect October 1, 2024.

Guidance for resolution plan submissions of certain domestic and foreign triennial full filers

Under Section 165(d) (in Title I) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (Dodd-Frank Act), and an implementing regulation (the Rule) issued jointly by the Federal Reserve Board and the FDIC (together, the agencies), large banking organizations are generally required to submit resolution plans that demonstrate how they can be resolved in an orderly manner under their ordinary resolution regime, which for domestic U.S. G-SIBs is generally the U.S. Bankruptcy Code. The agencies previously issued guidance applicable to U.S. G-SIBs and certain large foreign banking organizations (FBOs) to assist these firms in developing their resolution plans. In August 2025, the agencies adopted final guidance for the 2025 and subsequent resolution plan submissions by the largest (over $250 billion in total assets) U.S. domestic bank holding companies (BHCs) and certain FBOs. 

Foreign Filers 

For foreign bank triennial full filers, the final guidance applies to foreign Category II and III banking organizations (of which there are ten under the Federal Reserve Board's enhanced prudential standards rule), and the guidance supersedes the joint Guidance for Resolution Plan Submissions of Certain Foreign-Based Covered Companies, which was issued in December 2020. However, the final guidance is based in part on the superseded guidance as well as proposed guidance that was published in March 2020 but never finalized. The final guidance describes the agencies' expectations, depending on the resolution strategy chosen by the firm, regarding a number of key vulnerabilities in plans for an orderly resolution under the U.S. Bankruptcy Code (i.e. group resolution plan; capital; liquidity; governance mechanisms; operational; legal entity rationalization and separability; branches; and IDI resolution, if applicable). Separate guidance is provided for firms using a U.S. single point of entry strategy (SPOE) and a multiple point of entry or (MPOE) strategy. The guidance recognizes that the preferred resolution outcome for FBOs is often a successful home country-led resolution, and the guidance includes information on how FBOs can address the global resolution plan in their U.S. plan.

With respect to U.S. branch offices of an FBO, if the FBO's resolution plan assumes that the U.S. regulators will not take possession of the branch, the plan must support that assumption. In addition, the plan should describe how (among other things) the branch would continue to have access to financial market utilities (FMUs) for critical operations and maintain a net due to position and compliance with heightened asset maintenance requirements. In addition, even if such a scenario is not contemplated, a plan must provide an analysis of the impact of a branch ceasing operations on the FBO's FMU access.

Triennial full filers are required to submit a resolution plan every three years, alternating between full plans and targeted resolution plans. In addition, the agencies extended the submission deadline for the next full resolution plans to October 1, 2025, while the subsequent targeted plans will be due July 1, 2028, with future submissions due every three years after that. Submissions must include a public and confidential section.

The guidance recognizes that certain other rulemakings are currently under consideration. This includes a long-term debt (LTD) proposal that would apply to certain IDIs and certain U.S. intermediate holding company subsidiaries of FBOs. The agencies clarified that if the LTD rule is finalized prior to the October 1, 2025 submission deadline, the agencies will not expect filers to incorporate the requirements of such final rule into their 2025 submissions.

Domestic Filers

The purpose and structure of the guidance for domestic triennial full filers, which are domestic Category II and III banking organizations (of where there are five), is similar to the one for FBOs described above, but tailored to the domestic context. The guidance does not prescribe a specific resolution strategy that must be followed.  Among various topics addressed, the agencies noted that a resolution plan with an MPOE strategy that assumes a separate resolution of an IDI must explain how the resolution can be achieved in a manner that is least costly to the deposit insurance fund. The agencies further noted that some resolution plans in the past have included resolution mechanics inconsistent with the Federal Deposit Insurance Act, including inappropriate assumptions that all deposits (i.e. including uninsured deposits) could be transferred to a bridge depository institution (a point that is relevant to FBO MPOE plans also).

As with FBOs, the next full resolution plans for domestic triennial filers will be due October 1, 2025, while the subsequent targeted plans will be due July 1, 2028, with future submissions due every three years after that. 

FDIC Overview of Resolution under Title II of the Dodd-Frank Act

While Title I of the Dodd-Frank Act generally requires large banks to develop resolution plans, Title II of the Dodd-Frank Act confers authority on the FDIC to resolve large financial institutions under the Orderly Liquidation Authority provisions of the Dodd-Frank Act, i.e., in a financial emergency. Pursuant to that authority, the FDIC develops its own plans for resolving large, complex financial institutions. In April 2004, the FDIC published a paper that generally describes how the FDIC would apply its Title II resolution authority in practice. The paper is intended to provide transparency as to how the FDIC would act in such an emergency situation (i.e. where there is a threat to the financial stability of the United States).

Among other things, the report explains why a single point of entry strategy would likely be applied to a large U.S. G-SIB. Among the goals of an orderly resolution is avoiding the need to bail out investors and creditors of a failed institution. The FDIC's planning for a Title II resolution is focused on U.S. G-SIBs, although technically a U.S. intermediate holding company subsidiary of a foreign (non-U.S.) G-SIB would be legally eligible for a resolution under Title II if the applicable conditions were met.   

In a SPOE resolution of a U.S. G-SIB, the parent holding company would be placed into receivership, its subsidiaries, certain assets, and certain liabilities would be transferred to a bridge financial company, and most liabilities, in particular those due to unsecured creditors as well as shareholders would be left behind to absorb the cost of the resolution. The FDIC would be able to make use of the Orderly Liquidation Facility to provide liquidity to the bridge financial company. In administering a Title II resolution, the FDIC would benefit from (among other things), a temporary stay on counterparty actions, including with respect to qualified financial contracts. The FDIC estimates that the entire resolution process for a U.S. GSIB would take nine months to complete. 

OCC Guidelines establishing standards for recovery planning by certain large insured national banks, insured federal savings associations, and insured Federal branches

The Office of the Comptroller of the Currency (OCC) is proposing to amend its enforceable recovery planning guidelines (Guidelines) to expand the Guidelines to apply to insured national banks, Federal savings associations, and FDIC-insured Federal branches (banks) with average total consolidated assets of $100 billion or more (as well banks below that threshold in certain cases); incorporate a testing standard; and clarify the role of non-financial (including operational and strategic) risk in recovery planning. The OCC originally issued guidelines in 2016, which applied to banks with consolidated assets of $50 billion or more. The threshold was raised to $250 billion in 2018. In light of the large regional bank failures in 2023, on July 3 the OCC published a proposal to reduce the threshold to $100 million. The OCC has requested comment on whether the threshold should be lower. In addition, similar to the FDIC's IDI resolution plan rule, the OCC would include a testing element to its recovery planning framework.

Comments on the proposal were due by August 2, 2024.

The significance of resolution planning in other contexts

When the Federal Reserve Board approved BMO's acquisition of Bank of the West in January 2023, the Fed required that BMO (a triennial filer) submit an interim update to its resolution plan within six months after completion of the acquisition. The FDIC and the OCC recently updated their principles for reviewing bank mergers and acquisitions, and both agencies will consider the impact of a proposed transaction on the resolution and recovery planning capabilities of the institutions involved. Although it is not necessarily the case that the submission of a revised resolution plan will be required as part of a regulatory application for approval of a merger or acquisition transaction, the ability to quickly assess the impact of a merger or acquisition on a resolution plan will be an important part of a bank's business development planning to the extent it relies on growth by acquisition.