Bank resolution planning should promote preparedness, not paperwork

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This month, more than two dozen banking organizations underwent a ritual that has become a massive undertaking: They submitted voluminous plans to their regulators detailing how they should be resolved in the event of failure. Some plans were submitted to the Federal Reserve and FDIC, and some to the FDIC alone. Some of these plans run into the tens of thousands of pages. Many more plans were submitted to regulators across the globe. If history is a guide, much of that work will prove to have been extraneous.

Following the failures of SVB, Signature and First Republic Bank in the United States and Credit Suisse in Switzerland, the FDIC and Federal Reserve expanded the U.S. resolution planning requirements for large banks. But a review of the responses to the 2023 bank failures shows that more expansive bank-prepared resolution plans are unnecessary to improve resolution readiness and could distract from real preparedness.

Much like disaster preparedness, resolution readiness requires both individuals and emergency responders to be prepared for fast and effective action. Bank-prepared resolution plans are one piece of the response tool kit. But equally important is how resolution authorities use them when put to the test.

The case study of SVB is instructive. In December of last year, the FDIC's Office of Inspector General issued a report that concluded "the FDIC's readiness to resolve large regional banks … was not sufficiently mature to facilitate consistently efficient response efforts in a potential crisis failure environment." The report concluded that the FDIC had staffing and technology gaps that made it unprepared to carry out a large bank resolution. Resolution plans in the U.S. were not effective in March 2023 because the FDIC had not yet completed an initial review of plans submitted in December 2022. That failure was not attributable to the FDIC's gathering too little data; it was more likely attributable (at least partially) to gathering too much.

Moreover, the FDIC's response to the bank failures was hampered by organizational confusion. Prior to March 2023, FDIC officials had not conducted a basic analysis to determine the level of staff and contractor resources it would require for a large regional bank failure. Overlapping roles between different divisions at the FDIC led to "challenges, frustrations, and uncertainties related to conducting work in areas where [two] divisions had resolution roles and responsibilities." The FDIC had not finalized internal guidance for large bank resolutions. In particular, its own internal processes for marketing failed banks and conducting valuation of various resolution approaches had significant gaps. There was great uncertainty as to which of at least two different IT departments within the FDIC would perform information technology operations during the failure. These turned out to be significant shortcomings in the SVB resolution and have likely contributed to public criticism of the resolutions.

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In the United Kingdom, experience shows the limits of using plans as prescriptive, hypothetical exercises. The Financial Stability Board's review of Credit Suisse's resolution concluded that regulators were prepared to carry out a "single point of entry" resolution as outlined in the bank's plan. But, despite this preparation, authorities chose a different resolution method — one that was not contemplated in Credit Suisse's plan at all. Specifically, the report found that, despite the resolution planning measures Swiss authorities had undertaken, selling Credit Suisse to UBS was deemed "in the specific situation of the crisis faced by Credit Suisse … to have the best chances to stabilise the situation in that particular market environment." In other words, 15 years of resolution work went into creating a plan that was discarded once authorities were faced with the specific, idiosyncratic situation before them.

Despite these experiences, the FDIC under former Chairman Martin Gruenberg doubled down on the status quo approach: In 2024 the agency adopted new rules that expanded bank resolution planning requirements while overlooking the operational breakdowns identified at the FDIC. The new rules expanded the categories of information the FDIC collects and required more frequent resolution planning by more banks. But it did not address how the FDIC would review its own practices to ensure the agency is fully prepared to resolve large banks in the future. This is akin to addressing fire safety only by tightening building codes, without considering the response time of the fire department.

It is encouraging that acting Chairman Travis Hill has taken action to pause some of the changes adopted in 2024. He has also announced his intention to look at more practical aspects of the FDIC's failed bank auction process, like what kind of information acquirers need, and to use that to inform how the FDIC plans for resolution. This kind of practical reform would be the start of a new, more effective chapter for resolution planning.

The FDIC should adopt additional reforms to make resolution planning more practical and effective. For example, the FDIC should codify the relief granted in the April 2025 staff FAQs, eliminate the "credibility determination" that focuses both banks and agency personnel on grades rather than outcomes, and provide a specific list of capabilities that banks should have to support resolution. The FDIC can improve its own resolution capabilities by looking at how it administers the failed bank auction process — from how it compiles its prospective bidder list to how it estimates the cost of a bid. It should also consider how it can leverage more private sector expertise like investment banks to support its resolution work given the need for market expertise during periods of stress. Similarly, the FDIC and Federal Reserve should review their joint resolution planning rules and guidance to identify the information that is most salient in light of the lessons learned in 2023 and tailor the requirements accordingly.

Ever-expanding reams of paperwork have diminishing marginal returns. Like disaster preparedness, resolution readiness requires preparing for the worst-case scenario while recognizing one cannot plot the details of every possible response operation in advance. Increasingly complicated bank-prepared plans — and a disproportionate (or even exclusive) focus on those plans by resolution authorities — detracts from real resolution readiness. Instead of continually expanding bank plans, resolution authorities like the FDIC should determine what information they most need from banks, revise their rules accordingly and prepare to use that information to carry out their resolution responsibilities effectively in the future.