Living Will Rule Leaves Banks Reluctant to Plan Own Funerals

WASHINGTON — It turns out banks are reluctant to help dig their own graves.

In letters to federal regulators, several institutions said they remain worried about a requirement that they submit a "living will" outlining how best to dismantle them in a crisis.

Banks worry the resolution plans may be bad for business even at a healthy firm, urged regulators to ensure such outlines are confidential, and pushed for simpler requirements at second-tier bank holding companies. They also said agencies should be more flexible about the timing of plan submissions and revisions.

"The proposed rule in regard to resolution plans … imposes on covered companies an essentially unbounded requirement to develop a resolution plan covering a multitude of speculative scenarios in order to attempt to satisfy an unattainable regulatory standard," David T. Hirschmann, president for the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, wrote in a June 10 letter.

At least one key worry is how firms may be punished if regulators do not like their plans. Under the Dodd-Frank law, the agencies can take remedial action if the living wills are insufficient.

"This requirement would provide the agencies with largely unchecked authority to use their discretion as to whether to accept a covered company's resolution plan as the basis to substitute and impose their judgment on the strategic and operational decisions of covered companies (which are most likely at such time to be financially strong and well managed) and potentially to mandate significant restrictions on their activities and operations," Hirschmann wrote.

Living wills are part of Dodd-Frank's broader mandate allowing the federal government to seize and wind down institutions deemed too systemic to be resolved through bankruptcy.

The proposal, drafted jointly by the Federal Deposit Insurance Corp. and the Federal Reserve Board, would apply to systemically important firms overseen by the Fed as well as bank holding companies with over $50 billion of assets. While regulators could use the roadmaps to help in a government resolution scenario, the proposal — mandated under Title I of the Dodd-Frank Act — technically would order institutions to outline how it would be wound down according to the bankruptcy code.

After a plan was submitted, it would be updated both annually and whenever a company underwent a material business change. Firms would have to outline their organizational structure, map business lines to corresponding legal entities and provide details about management information of systems, among other requirements.

Companies with deficient plans would hear about it. They would have time to make improvements, but if subsequently a plan was still not adequate, regulators could layer on capital and liquidity requirements. If that still did not do the trick, the agencies — consulting with the Financial Stability Oversight Council — could force a firm to divest assets to ensure they could be wound down more easily.

"Under the proposed rule, a covered company that is completely healthy and well managed could be subject to significant restrictions on its operations and activities because the agencies were not satisfied with its hypothetical responses to a range of scenarios that are unlikely to ever come to pass as postulated," Hirschmann wrote.

But not all bankers appear concerned. James Powers, a senior company counsel for Wells Fargo & Co., sounded more open to the concept of resolution planning.

"These planning efforts have confirmed the soundness of our existing risk management and capital planning practices, while at the same time allowing us to identify areas where process enhancements might be beneficial," Powers wrote.

But while commenters said they supported a cooperative process between companies and the regulators to craft wills, they warned against measures that would too greatly impact the normal course of business.

"One of the challenges in the resolution-planning process is that a financial business should be managed to optimize capital formation, prudent maturity transformation and economic growth as a going concern, rather than for failure as a gone concern," said six trade associations representing large banks and nonbank financial firms in a June 10 letter. "As a result, supervisors should not create a system that manages for failure rather than for success."

The six groups, which included the American Bankers Association, said resolution-planning should first be done in a pilot program limited to the largest and most complicated firms, and preparing for a company's failure should not be a distinct exercise — but done in conjunction with broader crisis planning.

"Under our proposal, the final rule would be reconfigured so it reflects that the resolution-plan requirements … are just one part of a larger set of recovery- and resolution-planning processes that are currently being designed by supervisors in the United States and other countries by the [international] Financial Stability Board," they said.

A separate letter from 10 large regional bank holding companies that would be subject to the rule, including PNC Financial Services Group Inc. and Capital One Financial Corp., called on the regulators to tailor plan requirements to different subsets of firms based on their size. They said the standards should not be as onerous for straightforward retail-banking organizations — that would fit under the FDIC's traditional resolution model for failed banks — as they would be for giant, interconnected firms.

"The rules implementing the resolution plan requirements … should expressly incorporate a more limited regime for domestic BHCs that are predominantly composed of one or more subsidiary" depository institutions "that can be resolved in an orderly manner under the [Federal Deposit Insurance] Act and that do not pose the same type of systemic risks as larger, more complex, and more interconnected BHCs," the banks said.

Letters from individual bankers echoed similar views.

"Requirements for regional and other less complex bank holding companies should be tailored and proportional to their risk profile. Asset size, while a viable indicator, is an insufficient gauge of an institution's potential impact on the financial system during a crisis," wrote Dean Marotta, executive vice president for risk management at Zions Bancorp, in a June 10 letter. "With $51 billion in assets, Zions may be considered 'barely systemic'."

Meanwhile, foreign banking organizations with branches here called on the regulators to apply the $50 billion threshold only to their U.S. operations.

"Calculating the … threshold on the basis of an FBO's worldwide assets would result in approximately 98 out of an estimated 124 covered companies being FBOs … many with relatively small U.S. operations — an anomalous result that Congress surely did not intend," Sarah Miller, the chief executive officer of the Institute of International Bankers, wrote in a June 10 letter. "This approach would impose an undue burden on FBOs that do not pose any systemic risk in the United States, would make ineffective use of the agencies' limited resources, and would be inconsistent with the principles of national treatment and deference to home country supervisors."

Commenters also called for more flexibility in terms of when initial resolution plans and updates are due to the agencies.

Some supported a transition period for submission requirements to be phased in over time, and said the deadline schedules envisioned by the proposal were too rigid. For example, under the rule, annual updates would be due during the first quarter, but bankers pointed out that is also a time when institutions are completing stress tests and year-end reporting.

The joint trade association letter proposed that a company "be required to submit an updated annual resolution plan no less frequently than once every 12 months, but that the covered company be permitted to work out its own annual submission date with its supervisors."

Bankers also took issue with a proposed requirement that they submit an interim revision after each material business change in addition to the annual update.

"We respectfully submit that an interim update requirement (and the accompanying burden and expense) is not necessary since the benefit sought by such a requirement can be adequately realized through the annual updating requirement," Powers wrote.

But regulators have stressed that resolution plans need to be dynamic.

"It is important to note that review of the resolution plans will be an iterative process, involving meaningful discussion among the regulators and the institutions to ensure those plans are robust and can stand the test of time," FDIC Chairman Sheila Bair said Tuesday at an advisory committee meeting on the agency's new resolution powers. "This will not be a check-the-box exercise with 1,000-page plans laying on a shelf collecting dust."