Resolution Plans

Title I of the Dodd-Frank Act requires bank holding companies with $50  billion or more in consolidated assets and nonbank financial companies  designated by the Financial Stability Oversight Council (FSOC) to  periodically submit to FDIC, the Federal Reserve Board, and FSOC  resolution plans that detail how the companies could be resolved in a  rapid and orderly manner in the event of material financial distress or  failure. The rule requires companies subject to the rule to file  plans annually but implements filing deadlines on a staggered schedule  that is generally based on companies’ total nonbank assets (or, in the  case of foreign-based companies, their total U.S. nonbank assets). However, the Federal Reserve Board of  Governors did not make a similar not credible determination, but instead  said that the companies must take meaningful action to improve their  resolvability under the Code. U.S. Bankruptcy Code, Financial Companies, and Federal Regulators

Bankruptcy is a federal court procedure conducted under the Code. Both  regulators have processes for staffing review teams, determining whether  a plan includes all required information, assessing whether a plan’s  strategy mitigates obstacles to the company’s orderly resolution, and  documenting and vetting team findings and conclusions. Although the  regulators’ review processes are separate, the regulators coordinate with  each other in various ways, such as in their discussions about review  findings and their communications with companies. They also typically prepare  memorandums documenting their horizontal reviews. The regulators also have coordinated  on the guidance and feedback they provide to companies. FDIC and the Federal Reserve Have Made Progress Assessing Resolution Plans but Have Faced Challenges Providing Transparent and Timely Feedback

FDIC and the Federal Reserve have made progress reviewing the  resolution plans that companies submitted each year from 2012 to 2014  but have provided limited disclosures about their reviews and have not  always provided companies enough time to incorporate feedback given  the annual filing cycle. According to the  Office of Management and Budget’s directive on open government,  transparency promotes accountability by providing the public with  information about government activities. Without more fully disclosing the regulators’ frameworks for reviewing  plans and identifying plan deficiencies, the companies lack key  information for assessing and improving their plans. Without greater transparency, the lack  of a clear understanding of the regulators’ decisions, including the  reasons for viewing certain companies as less risky and allowing certain  companies to file reduced plans, may weaken public and market  confidence in resolution planning and limit the extent to which the  regulators can be held accountable for their decisions. As shown in  table 4, our analysis of the 2012, 2013, and 2014 resolution plan reviews  found that the regulators required around 5 to 13 months (or close to 9  months on average) to review the plans and jointly provide companies  with written guidance or feedback. However, the resolution  plan rule’s annual filing cycle may not be feasible. Federal Reserve officials attributed their long review time, in  part, to the plans’ complexity and said that companies ideally should have  6 months to incorporate regulatory feedback. Stakeholders’ Views on the Usefulness of Resolution Plans Vary

According to companies and stakeholders that we interviewed, resolution  planning has improved the resolvability of SIFIs under the Code. The  larger filers we interviewed generally said that resolution planning had led  to some operational improvements, while the smaller filers we interviewed  generally said that they had reaped few benefits from resolution planning. Additionally, regulators are using plans to enhance their supervision of  large financial companies. However, uncertainty exists about the plans’  ability to provide for a rapid and orderly resolution of the largest SIFIs, in  part because none has used its plan to go through bankruptcy. At the  same time, the regulators told us that they were incurring considerable  costs to review the plans, and companies said that complying with the  rule also had raised their costs. As previously  discussed, the regulators have developed and revised their approaches  for analyzing and assessing the plans but have publicly disclosed limited  information about their reviews. The regulators have not disclosed  their assessment frameworks and criteria for confidentiality reasons,  which limits the potential for companies to better achieve the Dodd- Frank Act’s objective. Because the resolution plan rule requires companies to file plans  annually, some companies may not have sufficient time to fully  incorporate such guidance or feedback into their subsequent plans  and obtain their board of directors’ approval of the plans by the  submission deadline. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) the processes used by the Federal  Deposit Insurance Corporation (FDIC) and Board of Governors of the  Federal Reserve System (Federal Reserve) (jointly, the regulators) to  review resolution plans; (2) the extent to which the regulators have  determined whether resolution plans are not credible or would not  facilitate an orderly resolution under the Bankruptcy Code; and (3)  stakeholder views on the usefulness of the resolution plans to companies  and other stakeholders. To examine the process used by the regulators to review resolution plans  and the extent to which the regulators have determined whether  resolution plans are not credible or would not facilitate an orderly  resolution under the Code, we reviewed Section 165(d) of the Dodd- Frank Wall Street Reform and Consumer Protection Act, the final  resolution plan rule, and FDIC’s and the Federal Reserve’s policies and  procedures.
Why GAO Did This Study

Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires bank holding companies with $50 billion or more in total assets and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve to prepare plans for their rapid and orderly resolution under the Code. In 2011, the regulators issued a rule to require companies to annually file a resolution plan. If they jointly found a plan was not credible, the company could be subject to more stringent requirements. GAO was asked to review the regulators' programs for assessing resolution plans. This report examines each regulator's review processes, the progress made in assessing plans, and stakeholder views on the usefulness of the plans.
GAO analyzed FDIC's and the Federal Reserve's policies and procedures, documentation of plan reviews, guidance and feedback provided to companies, and public plans. GAO also interviewed the regulators, a judgmental sample of 25 companies (18 percent of all companies required to file a plan) based on assets, and a variety of market participants and academics based on their expertise, experience working with companies, or use of public plans.

What GAO Found

The Federal Deposit Insurance Corporation (FDIC) and Federal Reserve System (Federal Reserve) have developed separate but similar review processes for determining whether a resolution plan is “not credible” or would not facilitate a company's orderly resolution under the Bankruptcy Code (the Code). Both regulators have processes for staffing review teams, determining whether a plan includes all required information, assessing whether a plan's strategy mitigates obstacles to the company's orderly resolution, and documenting and vetting team findings and conclusions. Although the regulators' review processes are separate, the regulators coordinate with each other by meeting jointly with companies, working together to discuss and share review findings, and jointly issuing guidance and feedback to companies.
The regulators have made progress assessing resolution plans but have provided limited disclosures about their reviews. Following their 2012, 2013, and 2014 plan reviews, the regulators clarified and expanded their expectations for the plans—jointly providing companies with guidance or feedback. The regulators did not jointly make any not-credible determinations but reported they may do so for the 2015 plans. However, they have not disclosed their frameworks for determining whether a plan is not credible. They also developed but have not disclosed their criteria for reducing plan requirements for many smaller companies. Without greater disclosure, companies lack information they could use to assess and enhance their plans. The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities. A lack of information on how the regulators assess plans and allow some companies to file reduced plans could undermine public and market confidence in resolution plans.
In addition, the resolution plan rule requires companies to annually submit plans approved by their board of directors. However, the annual filing cycle may not be feasible. GAO found that the regulators took 9 months, on average, to complete their reviews. FDIC said companies can take up to 3 months to obtain internal approval of their plans. The regulators attributed their long review time in part to the plans' complexity, and one regulator said that companies ideally should have 6 months to incorporate feedback. Absent a longer filing cycle, companies may not have sufficient time to revise their plans to incorporate regulatory feedback intended to enhance their resolvability under the Code.
According to companies and stakeholders that GAO interviewed, resolution planning has improved the resolvability of large financial companies under the Code. Companies with $100 billion or more in nonbank assets generally said that resolution planning also had led to some operational improvements, but companies with less than $100 billion in nonbank assets generally said that they had reaped few benefits from resolution planning. However, whether the plans of the largest companies actually would facilitate their rapid and orderly resolution under the Code is uncertain, in part because none has used its plan to go through bankruptcy. At the same time, the regulators told GAO that they were incurring costs to review the plans, and companies said that complying with the rule also had raised their costs.

What GAO Recommends

GAO recommends that FDIC and the Federal Reserve publicly disclose information about their assessment frameworks and reduced plan criteria for smaller companies and revise the annual filing requirement. The regulators agreed with GAO's recommendations.