WASHINGTON — With its proposal to force big banks to deliver "recovery plans," the Office of the Comptroller of the Currency is filling a gap in the current regulatory regime — and making a power play at the same time.
Until now, the OCC has largely sat on the sidelines as the Federal Deposit Insurance Corp. and Federal Reserve Board forced banks to submit "living wills" detailing how they could be taken apart in the event of a crisis. But observers said the OCC's plan is broader and more focused on preventing a failure from occurring rather than just cleaning one up.
"The OCC is pulling up a chair to the table where the Fed and FDIC are currently sitting with their involvement in the resolution plan processes, only the OCC's proposal is more about banks having resiliency. This now gives the OCC a voice at the table," said Julie Williams, a managing director and head of the domestic advisory practice at Promontory Financial Group, and a former general counsel at the OCC. "I would characterize this proposal as a logical third leg of a three-legged stool in looking comprehensively at banking companies in terms of their risk management, resiliency and resolvability."
Industry observers said the OCC's plan makes sense considering the current regulatory regime, though they warned that some requirements — specifically the ones mandating that a bank detail its exposure to other parties and added responsibilities for the management and board of directors — will be difficult to implement.
The proposal would require banks to look at a wide range of stress scenarios to determine the quantitative and qualitative triggers specific to each institution's profile, and then propose at least one recovery option per trigger and anything that could impede that recovery.
The stress scenarios can range from loan portfolio "shocks" or a cyberattack to marketwide problems like the failure of a systemically important institution or a critical third-party relationship. Banks would have to identify potential triggers to these stress events and then detail how the recovery for each pitfall would be carried out and who would handle the task.
A key part of the proposal is a section that talks about how banks must explain how they are affected by their "interconnections and interdependencies" when describing their organizational and legal structure. This includes explaining the connections and exposure across all business lines at the bank level, affiliates at the holding company and "with critical third parties."
"The description should address whether a disruption of these interconnections or interdependencies would materially affect the funding or operations of the covered bank and, if so, how," the proposal said.
Observers said this may be among the more complicated parts of the plan, since it could require further system changes and assessing weaknesses across multiple parties.
"The critical part of this [proposal] is the ability to create a technological system, or overlay, that connects all the processes together so that it understands how to identify anomalies and relate them through automated pattern recognitions," said Will Newcomer, vice president of product and strategy in the Financial Risk & Reporting group at Wolters Kluwer Financial Services. "That's where the real expense of this is going to be."
Many said the proposal closely mirrors other guidance that the OCC issued last year on risk governance within its so-called heightened standards for large banks. The heightened standards, like the OCC's proposal on recovery plans, place a heavier responsibility on the bank's management and board of directors.
The proposal would require management to review the plan at least once a year or when there is a "material event" and make appropriate changes. The bank's board must also review the recovery plan at least once a year and anytime management makes a change.
"This is heightened standards on steroids in terms of identifying risks and what triggers would prompt management and the board to look at their needs and recovery options," Williams said. "Banks will find this to be the combination of stress testing that the largest institutions are already doing and the heightened standards that are applicable at the bank subsidiary level."
The OCC's proposal is wide-ranging in terms of what the agency wants to see in bank recovery plans, but many sources said large banks will be able to adjust to the OCC's proposal better than when the living wills first took effect because now they already have to consider certain stress scenarios when putting together a resolution plan.
"There are different sets of expectations" with the OCC's recovery plan, said Karen Shaw Petrou, managing partner of Federal Financial Analytics.
"The more a national bank is resilient, the less it needs to demonstrate how to be resolved so the rules are compatible," Petrou said.
The OCC may have been moved to issue the plan because it is the only prudential bank regulator not required to oversee living wills and yet it supervises some of the largest institutions whose holding companies must write and submit such plans. Though last week's proposal was largely a surprise, several observers said it was inevitable.
"There are a lot of good things in the outline of the resolution planning that if you add some more analytics, it really becomes a recovery plan," Newcomer said. "This is really the bridge between the CCAR [Comprehensive Capital Analysis Review] and the resolution plans. … This is going to be the inevitable step to turn a large expense into something that's a usable business tool."