Alert
Alert
By Rodney R. Peck,
11.29.12
This analysis updates a previous memo and incorporates advice we have received from the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) regarding the preparation of living wills by covered foreign banking organizations (“FBOs”), including an important exception for foreign banks only operating representative offices in the U.S., as well as a more limited exception for smaller FBOs in the U.S. (the “exempted covered company” exception).
In November 2011, the FRB and the FDIC adopted regulations requiring FBOs with global assets on a consolidated basis exceeding $50 billion and operating in the United States to provide a resolution plan for their operations in the U.S.
Because of the tier structuring based upon U.S. asset size, which determines when an FBO must submit its living will, the vast majority of covered foreign banks are required to submit their living wills on July 31, 2013 or December 31, 2013.
More importantly, the FBO community has become aware that numerous FBOs that have limited operations in the U.S. either may be completely exempt from the obligation of filing a living will, or else may be able to make use of a special, negotiated exception from the scope of a living will (provided that the FRB and/or the FDIC provide their approval of an application that must be submitted on or about the first week of April of 2013).
FBO Living Will Requirements
Living wills require extensive and detailed disclosure of the FBO’s structure and operations, as well as the FBO’s suggested approach for resolving the banking and non-banking assets under the federal Bankruptcy Code and the bank receivership provisions of the FDIC. In addition, for FBOs that are subject to receivership/insolvency laws in other jurisdictions (including, of course, the FBO’s home country), a discussion of the applicability of those laws is also required.
The FRB and the FDIC have learned from their initial review of the living wills submitted by the largest foreign and domestic banks that the exercise of preparing a living will is useful not because it provides a clear path to resolve an insolvent holding company or depository institution, but rather, because it provides both the U.S. regulators and the FBO a structured approach at the corporate level for resolving an insolvent institution based upon the legal structure rather than the cross-corporate operations of the enterprise as a whole.
Specifically, large, multinational financial companies operate based upon the implementation of business goals and not upon corporate structures and similar formalities. The “mapping” process envisioned by a living will permits both the U.S. regulators and the FBO to understand how the enterprise function can best be preserved by analyzing and determining how to preserve functionality across corporate members of the affiliated group that would be affected by the various insolvency regimes, should some or all of an FBO family fail.
As noted above, the FDIC and the FRB have recognized that the living will exercise is an iterative, ongoing process that will reoccur each year—with the intent that each year the level and quality of analysis will continually improve. (Of course, as the global financial system experiences or identifies new risks of loss, it is probable that at the time of each annual review of an FBO’s living will the U.S. regulators may require a new or different analysis be employed to the previous year’s living will.)
The result of the submissions of living wills for the largest banking organizations has resulted in two broad categories of analysis being addressed for bank and non-bank assets: The first is a recovery plan for FBOs that may be in danger of failing but may recover, such as by obtaining additional capital, selling of assets or lines of business, etc. The second category is a resolution plan, which presents a coherent organized pathway to liquidate an FBO (or corporate components of an FBO that has failed) and cannot continue to be operated except by utilizing the various applicable insolvency laws.