## _cr15171 - EXECUTIVE SUMMARY AND KEY FINDINGS ## Source details **Canonical URL:** [_cr15171 - EXECUTIVE SUMMARY AND KEY FINDINGS](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15171.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15171.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15171.pdf.json) --- ### INTRODUCTION AND OVERVIEW - The Orderly Liquidation Authority (OLA) was introduced in 2010 as part of the Dodd-Frank Act (DFA) to facilitate resolution of most financial institutions that could cause severe systemic disruption and/or expose taxpayers to loss. - OLA provides a credible alternative to ordinary bankruptcy proceedings and is designed to be deployed using a single point of entry (SPE) strategy at the holding company level. - SPE strategy: FDIC would initiate an OLA receivership at the holding company level, recapitalizing the group by having shareholders and creditors of the failed holding company absorb losses and avoiding separate resolution of operating companies. - Feasibility of SPE depends on sufficiency of ‘bail-inable’ debt at the holding company level and internally within the group; this is often difficult for complex insurance groups, where a multiple point of entry (MPE) may be more appropriate. - Reforms are required to address structural and organizational impediments to orderly resolution. ### BANKING SECTOR: ALIGNMENT WITH FSB KEY ATTRIBUTES (KA) - The resolution regime under OLA and the Federal Deposit Insurance (FDI) Act is in broad conformity with the Financial Stability Board’s Key Attributes (KA). - FDIC can exercise a broad range of administrative resolution powers to deal with failing systemically important banks or bank holding companies (BHCs) while protecting financial stability. - U.S. regime reflects FDIC’s deep experience in bank resolution and places U.S. authorities at the forefront of international policy on bank resolution. - Shortcoming: U.S. resolution regime does not fully align with FSB requirements for cross-border cooperation. ### INSURANCE SECTOR: GAPS AND CONCERNS - Insurance companies are excluded from Title II of OLA; insurers must be resolved under state insurance laws that are not consistent with the KA. - State frameworks focus on policyholder protection and use a largely court-driven receivership process that may lead to delays despite early-stage triggers. - Coordination issues arise where an insurance company is under a holding company that can be resolved under OLA—uncertainties on coordination among state resolution authorities and with federal authorities. - NAIC has promoted harmonization of state laws, but variance among state frameworks could hinder prompt resolution of systemically important insurance groups. - The KA and Assessment Methodology (AM) may need modification to account for insurance-specific features. ### KEY RECOMMENDATIONS (HIGHEST-LEVEL) - Extend scope of the resolution regime to cover all systemic firms and branches: - Amend DFA to apply to systemic insurance companies and to systemic U.S. branches of foreign banks, with tailored extension for branches to achieve cooperative solutions with foreign resolution authorities. - Clarify statutory grounds and guidance for initiating resolution proceedings to ensure timely entry at a point of non-viability. - Provide FDIC explicit authority to require group entities to continue providing essential services to the entity in resolution, its successor (including a bridge entity under SPE) or an acquirer. - Enhance FDI Act to empower FDIC to override certain early termination rights for contracts of a resolved bank’s subsidiaries and affiliates. - Identify disclosure requirements warranting explicit and temporary disclosure exemptions under OLA and finalize related regulatory documentation. - Align arrangements for coordination with host authorities from jurisdictions not represented on CMGs with FSB (draft) guidance. - Determine adequacy of state insurance receivers’ organization and resources to manage failure of a systemically important insurer. - Authorities should closely scrutinize firms’ recovery and resolution plans and use enforcement powers if shortcomings are not addressed timely. --- ### INSTITUTIONAL AND MARKET STRUCTURE — HIGHLIGHTS AND NUMBERS - Financial sector assets equivalent to 480 percent of gross domestic product (GDP). - Eight U.S. G-SIBs account for 22 percent of the total assets of all the G-SIBs. - Depository institutions (mostly banks), pension funds, mutual funds and insurance companies account for around 70 percent of financial sector assets. - Banks hold 16 percent of all assets held by financial institutions. - The five largest banks account for about 45 percent of the U.S. banking system’s total assets (twice the share of 10 years ago). - Number of banks reached an all time low in first quarter of 2014. - FDIC’s problem bank list fell to 329 at end September 2014, from a peak of 888 in March 2011; these banks had combined assets of US$126 billion. - Insurance sector: - U.S. insurance market is the largest in the world. - Insurance sector assets correspond to a half of banking sector assets. - There were 4,538 insurance companies reporting to the NAIC at the end of 2013. - Total premium volume in 2013 was $1.56 trillion, accounting for 33 percent of the global market. - Three main sectors: life, property and casualty (P&C), and health insurance. - Four large insurance groups (TIAA-CREF, State Farm Mutual, Nationwide Mutual and USAA) have deposit-taking institutions and are regulated by the FRB as Saving & Loan Holding Companies (SLHCs). - Three U.S. insurers—American International Group (AIG), MetLife, and Prudential—have been identified as G-SIIs by the Financial Stability Board (FSB). - Securities and derivatives markets: - Nominal value of outstanding debt securities at end-2013: about $39 trillion (230 percent of GDP). - Notional amount of outstanding derivatives contracts at end 2013: $237 trillion. - Four large commercial banks represent 93 percent of the total banking industry notional amounts. - Derivative contracts concentration by type: Interest rate products 82 percent; Swap contracts 64 percent; Futures and forwards 18 percent; Options 14 percent. --- ### SCOPE, RESOLUTION AUTHORITY, AND RESOLUTION POWERS (KA 1–3) ### Scope and legal definitions - Title II (DFA) scope covers systemically significant or critical financial companies at point of failure, including holding companies and nonbank financial companies, except insurance companies and systemic U.S. branches of foreign banks. - DFA defines "financial company" to include: - (i) bank holding companies; - (ii) nonbank financial companies supervised by the FRB pursuant to section 113 of the DFA; - (iii) companies predominantly engaged in activities that are financial in nature or incidental thereto as set forth in FRB regulations. - Recommendation: Amend DFA so systemically important insurance companies and U.S. branches of foreign banks are subject to a Title II resolution regime similar to other “covered financial companies” (with tailored treatment of branches). ### Resolution authority — FDIC role and interactions - FDIC is the designated receiver under Title II; appointment involves the “three keys” process: recommendation of two-thirds of directors of both the FRB and the board of the FDIC, and a determination by the Secretary of the Treasury, in consultation with the President. - FDIC statutory objectives and functions broadly align with KA2; FDIC enjoys operational independence, accountability, and legal protections. - Uncertainty exists regarding allocation of responsibilities between FDIC and state insurance commissioners for systemically important insurance companies: - If state regulator does not commence resolution within 60 days of a systemic risk determination with respect to an insurance company, FDIC “shall have the authority” to stand in place of the state regulator and file judicial action to place company into orderly liquidation under state laws—but the FDIC’s role thereafter is unclear (initiate vs conduct). - Recommendation: Clarify roles and responsibilities between Federal and State authorities in resolution of an insurance group under Title II; finalize internal procedures for the “three keys” process. ### Core resolution powers and gaps - FDIC/OLA and FDI Act powers broadly provide for: - removal/replacement of management and directors; recovery of compensation; temporary control and operation of firms; transfer or sale of assets and liabilities without consent; establishment of bridge institutions; asset management vehicles; stays on early termination rights; moratoria on creditor actions; closure and orderly wind-down with prompt pay-out or transfer of insured deposits. - Notable gaps: - DFA and FDI Act do not include explicit statutory bail-in provisions; bail-in-like outcomes can be achieved economically by terminating rights and effectuating securities-for-claims exchanges under Title II SPE strategy, but statutory clarity is needed. - Both DFA and FDI Act lack explicit authority to require non-resolved group entities to continue providing essential services to the entity in resolution; state insurance law similarly lacks such explicit powers. - State insurance law generally requires court approval for many restructuring powers and may lack the speed and flexibility envisaged by the Key Attributes (notably for bail-in, temporary stay, and other measures). ### Timing and triggers for resolution - DFA Section 203(c)(4) defines “in default or in danger of default” for Title II and includes criteria such as: - (A) a case has been, or likely will promptly be, commenced with respect to the financial company under the Bankruptcy Code; - (B) the financial company has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; - (C) the assets of the financial company are, or are likely to be, less than its obligations to creditors and others; - (D) the financial company is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business. - Recommendation: Issue guidance elaborating “suitable indicators of non-viability” (EN 3.1(c)) with illustrative scenarios, clarifying interpretation of “likely to” and “substantially all,” to enable commencement of OLA prior to insolvency. --- ### SUPPORTING FEATURES AND LEGAL SAFEGUARDS (KA 4–5) ### Temporary stays, set-off and netting (KA4) - DFA and FDI Act: - QFCs: counterparties cannot exercise rights to terminate, liquidate or net solely by reason of appointment of FDIC as receiver until 5:00 p.m. (Eastern Time) on the business day following appointment or after notice of transfer. - Other contracts: counterparties prohibited from exercising termination, acceleration or default rights without FDIC consent for the 90-day period commencing on date of FDIC appointment as receiver. - State insurance: - Many states (21) have adopted a “safe harbor” that excludes QFCs from any stay, permitting early termination and netting of QFCs upon commencement of receivership or exercise of resolution powers. - Finding: State insurance regimes vary; lack comprehensive temporary stay provisions consistent with KA4/EC4.3. - Recommendation: Amend the FDI Act to enable FDIC to override early termination rights in contracts of subsidiaries and affiliates of an IDI undergoing resolution; encourage states to align insurance safe harbor approaches with KA4 principles. ### Safeguards and creditor treatment (KA5) - DFA Title II and the FDI Act: - Statutory creditor hierarchies exist; Title II requires unsecured creditors bear losses consistent with hierarchy and ensures shareholders receive payment only after other claims and the OLF are fully paid. - Title II includes a statutory “no creditor worse off than in liquidation” (NCWOL) safeguard: creditors must receive not less than what they would have received in chapter 7 bankruptcy or similar state insolvency law. - DFA permits departures from pari passu in specified circumstances to maximize value or preserve operations, subject to NCWOL. - State insurance: - State receivership laws and IRMA provisions require fairness and equitable treatment; rehabilitation plans must be fair and equitable and provide no less favorable treatment than in liquidation (Section 403 A of IRMA). - Court role: many significant insurance resolution powers require court approval; timelines could impede rapid intervention. - Recommendations: - Consider adopting a DFA-like limitation to judicial remedies under the FDI Act to limit remedies to money damages (for clarity and to reduce risk of reversal). - Ensure clarity on objectives applicable when Title II is used in insurance contexts (interaction of DFA objectives and state receivership objectives). --- ### FUNDING IN RESOLUTION (KA 6) ### OLF, DIF, and state guaranty arrangements - Orderly Liquidation Fund (OLF) under DFA: - OLF can borrow from U.S. Treasury and be repaid from asset sale proceeds or, if insufficient, through risk-based assessments on the financial sector. - FDIC borrowing for liquidation may not exceed: - (i) an amount equal to 10 percent of the total consolidated assets of the company during the first 30 days of the receivership, followed by - (ii) an amount equal to 90 percent of the fair value of the total consolidated assets of the company that are available for repayment, once this has been calculated by the FDIC. - Treasury Secretary may not purchase obligations unless agreement with FDIC provides a specific plan for repayment and demonstrates FDIC income from assets and assessments will amortize borrowings within a specified time period. - Deposit Insurance Fund (DIF): - DIF is funded on an ex-ante basis by assessments on IDIs. - As of December 31, 2014, the DIF had a fund balance of US$62.8 billion. - The DIF's ratio of reserves to estimated insured deposits as of September 30, 2014, was 0.89 percent. - DFA increased the minimum reserve ratio and FDIC Board set a target of 2 percent; on current assessment rates this will not be reached before 2027. - FDIC has standing authority to borrow $100 billion from the U.S. Treasury if necessary for deposit insurance purposes. - State insurance guaranty associations (GAs/GFs): - Nationwide system exists to protect policyholders; payments triggered by insurer insolvency and issuance of an order of liquidation; laws differ on coverage maxima per policyholder (between $100,000 and $500,000 depending on product and state). - Guaranty associations are not pre-funded and generally rely on estate assets and ex post assessments; life and health GA report a borrowing capacity of about $10 billion per year but not from public sector. - Uncertainty whether GAs would provide pre-insolvency funding; life and health GAs could, in principle, finance pre-insolvency measures but are not required and historically reluctant. - Findings: - DFA financing arrangements are consistent with KA; OLF and DIF provide temporary public funding with ex post recovery mechanisms. - State insurance funding arrangements are not equipped to support resolution of systemically important insurers. --- ### CROSS-BORDER COOPERATION (KA 7–9) ### General assessment and barriers - U.S. regime is not fully aligned with FSB requirements on cross-border cooperation: - No general statutory mechanism exists to give prompt legal effect in the United States to foreign resolution actions. - Depositor preference rules subordinate claims from depositors at foreign branches of U.S. banks vis-à-vis claims from domestic depositors if not dually payable, which is not in line with the KA. - Prospect of ring-fencing assets of U.S. branches of foreign institutions may undermine cross-border cooperation. - Branches: - Federally licensed domestic branches of foreign banks are resolved under Federal law (IBA); state-licensed branches are resolved under state laws. - As of December 19, 1991, foreign firms may not establish insured branches in the U.S.; insured branches operating as of that date were permitted to continue—52 branches were grandfathered as of that date; number of insured branches is currently 10. - Recommendations: - Amend relevant frameworks for banking and insurance resolution to require authorities involved in resolution of a systemic U.S. uninsured branch of a foreign firm to cooperate with competent foreign resolution authority. - Subject foreign branch deposits to depositor preference regardless of whether they are dually payable in the U.S. ### CMGs and COAGs (KA8 / KA9) - Crisis Management Groups (CMGs) exist for eight U.S. G-SIBs and for two G-SIIs; CMG membership includes FDIC, FRB, OCC (as relevant), SEC (where broker-dealer activity large), and host authorities. - U.S. home authorities have executed institution-specific cooperation agreements (COAGs) with 21 authorities from 11 jurisdictions for all seven U.S. G-SIBs with significant cross-border operations; multilateral COAGs for U.S.-based G-SIIs are ongoing. - Finding: CMGs and COAGs are important fora; further work needed to align cooperation with non-CMG host authorities and to formalize procedures. --- ### RECOVERY AND RESOLUTION PLANNING (KA 10–11) ### Living wills and RRP regime - Covered entities required to prepare and annually update plans: - Bank holding companies with consolidated assets of at least $50 billion; - Non-bank financial companies (NBFCs) subject to FRB supervision (including systemically important insurance holding companies); - IDI with total assets of $50 billion. - 165(d) Rule staggered submissions by asset size (deadlines provided in source); FRB and FDIC jointly review Title I living wills. - Observed shortcomings in banks’ 2013 plans (eleven largest banking groups): - (i) unrealistic or inadequately supported assumptions; - (ii) failure to make or identify changes needed to enhance prospects for orderly resolution. - Recommendation: Authorities should closely scrutinize firms’ plans and use enforcement powers if identified shortcomings are not addressed in a timely manner. ### SPE strategy and insurance groups - FDIC SPE overview: - SPE relies on resolving the top-tier holding company, establishing a bridge financial company, terminating rights of equity and unsecured creditors at the holding company, followed by a securities-for-claims exchange six to nine months later to recapitalize the group. - Practical challenges: - Adequate holding company capital and debt must exist to support bail-in. - Cross-border effectiveness, continuity of access to FMIs, and continuity of essential operational services are material constraints. - FSB TLAC proposals and ISDA Resolution Stay Protocol are relevant developments. - Insurance groups: - Insurance groups may require MPE strategies because most loss absorbing capacity is at operating insurance subsidiaries oriented to protecting policyholders at the state level. - Recovery and resolution planning for insurance groups is less advanced; insurance-specific guidance needed on identification of critical functions, appropriate capital structure, and resolution strategies. - Recommendation: Conduct a horizontal review of submissions from U.S.-based G-SIIs to support insurance-specific guidance and analyze applicability of SPE to insurance groups given the location of loss absorbing capacity. ### Resolvability assessments and powers to require changes - FDIC has undertaken initial group resolvability assessments for U.S.-based G-SIBs; similar assessments for NBFCs and G-SIIs are less advanced. - FRB and FDIC have powers under Section 165(d) to require remediation if living wills are not credible; authorities have used iterative feedback and may use enforcement measures. - Recommendation: Broaden resolvability assessments to include all institutions whose failure could have serious adverse effects, and use statutory powers to require structural or operational changes where necessary. --- ### ACCESS TO INFORMATION AND INFORMATION SHARING (KA 12) ### Authorities’ access and information sharing - FDIC has strong powers to access information material for planning, preparation and implementation of resolution measures, including via Section 165(d) living wills and special examination authorities for entities with consolidated assets equal to or greater than $50 billion (subject to condition the entity is not in a generally sound condition for some uses). - Once FDIC appointed receiver, other federal regulators must make available all records relating to the covered financial company (DFA Section 210(i)). - Legal gateways permit disclosure of non-public information to domestic and foreign authorities subject to confidentiality safeguards (statutory provisions and regulations cited in source). - Firms subject to recovery and resolution planning are required to maintain robust Management Information Systems (MIS) able to produce essential information on a legal entity basis, including: - monthly financial statements for each material entity (at least monthly); - external and intragroup credit exposures by type, counterparty, maturity; - guarantees, cross holdings, financial commitments between material entities; - key third party contracts and service level agreements; and - updated legal records for domestic and foreign entities. - Findings: U.S. bank and insurance resolution regimes provide adequate powers for agencies to access information material for planning and implementation of resolution measures. --- ### ADDITIONAL NOTABLE LEGAL AND PRACTICAL POINTS (SELECTED) - Court role and timelines: - Under Title II, if the U.S. District Court for the District of Columbia does not decide a statutory review within 24 hours, liquidation under Title II automatically commences. - State insurance receivership actions typically require court approval and filings may include periodic reporting to the court (e.g., IRMA section 117 reporting timelines). - Legal protections: - FDIC and its staff have statutory and policy-based protections against liability for actions and omissions made in good faith; indemnification policies exist. - State insurance commissioners’ legal protection varies by state; some states provide immunities or indemnities. - Funding metrics and targets: - DIF fund balance as of December 31, 2014: US$62.8 billion. - DIF ratio to estimated insured deposits as of September 30, 2014: 0.89 percent. - FDIC Board target reserve ratio: 2 percent; on current assessment rates this will not be reached before 2027. - Timelines and quantitative references preserved verbatim where cited above (examples include "5:00 p.m. (Eastern Time) on the business day following the date of the appointment" and "the 90-day period commencing on the date of appointment of the FDIC as receiver"). *Source: EXECUTIVE SUMMARY AND KEY FINDINGS and related sections from IMF staff country report content unit _cr15171.* ### EXECUTIVE SUMMARY AND KEY FINDINGS ____________________________________________________ 5 ### _cr15171 - EXECUTIVE SUMMARY AND KEY FINDINGS ____________________________________________________ 5 ### INTRODUCTION AND OVERVIEW - The Orderly Liquidation Authority (OLA), introduced in 2010 as part of the Dodd-Frank Act (DFA), provides a framework to facilitate resolution of most financial institutions that could cause severe systemic disruption and/or expose taxpayers to loss. - OLA is intended as a credible alternative to ordinary bankruptcy proceedings that can be disruptive to financial stability. - U.S. authorities have developed capabilities to deploy OLA and the single point of entry (SPE) strategy that leverages holding company structures to resolve systemically important financial groups. - SPE strategy: FDIC would initiate an OLA receivership at the holding company level, allowing recapitalization where shareholders and creditors of the failed holding company absorb losses and avoiding separate resolution of operating companies (e.g., IDIs, insurance companies). - Feasibility of SPE depends on sufficiency of ‘bail-inable’ debt at the holding company level and internally within the group; this precondition can be difficult for complex insurance groups, where a multiple point of entry (MPE) may be more appropriate. - Reforms to address structural and organizational impediments to orderly resolution are required. ### BANKING SECTOR: ALIGNMENT WITH FSB KEY ATTRIBUTES (KA) - The resolution regime under OLA and the Federal Deposit Insurance (FDI) Act is in broad conformity with the Financial Stability Board’s Key Attributes (KA). - The FDIC can exercise a broad range of administrative resolution powers to deal with failing systemically important banks or bank holding companies (BHCs) while protecting financial stability. - U.S. regime reflects FDIC’s deep experience in bank resolution and places U.S. authorities at the forefront of international policy on bank resolution. - Shortcoming: U.S. resolution regime does not fully align with FSB requirements for cross-border cooperation. ### INSURANCE SECTOR: GAPS AND CONCERNS - Insurance companies are excluded from Title II of OLA; resolution must be conducted under state insurance laws that are not consistent with the KA. - State frameworks are primarily focused on policyholder protection and use a largely court-driven, receivership process that may lead to delays, despite early-stage triggers for receivership. - Coordination issues arise where an insurance company is under a holding company that can be resolved under OLA—uncertainties on how state resolution authorities coordinate among themselves and with federal authorities. - NAIC has promoted harmonization of state laws, but variance among state frameworks could hinder prompt resolution of systemically important insurance groups. - The KA make relatively few adjustments for insurance-specific features; debate remains on the degree to which KA and the Assessment Methodology (AM) should be modified for insurance. ### SCOPE, RESOLUTION AUTHORITY, AND RESOLUTION POWERS (KA 1–3) - Recommendation: Extend scope of the resolution regime to cover all systemic firms and branches. - OLA currently covers systemically significant or critical financial institutions at the point of failure, including holding companies and nonbank financial companies, except insurance companies and systemic U.S. branches of foreign banks. - To align with KA, DFA should apply to systemic insurance companies and to systemic U.S. branches of foreign banks, with tailored extension for branches to achieve cooperative solutions with foreign resolution authorities. - FDIC’s resolution mandate is clearly defined and its statutory objectives and functions broadly align with KA; accountability and transparency framework in place; legal protections for actions and omissions within scope exist. - Uncertainty exists regarding allocation of responsibilities between FDIC and state insurance commissioners for systemically important insurance companies (FDIC is authorized under certain DFA circumstances to file judicial action to place an insurer into receivership). - Recommendation: Clarify statutory grounds for initiating resolution proceedings to ensure they apply suitably early at a point of non-viability. - Recommendation: Provide FDIC explicit authority to require group entities to continue providing essential services to the entity in resolution, its successor (including a bridge entity under SPE) or an acquirer. - State insurance law lacks a complete set of KA3 resolution powers (e.g., bail-in, temporary stay); addressing this would require extending OLA powers to systemically important insurance companies. - Note: Challenges in applying the draft AM to insurance companies should be recognized and may require international discussion (including FSB Cross-border Crisis Management Group for Insurers). ### SUPPORTING FEATURES AND LEGAL SAFEGUARDS (KA 4–5) - Resolution safeguards in DFA and FDI Act are generally consistent with KA, with scope for improvement regarding state insurance regimes. - DFA and FDI Act provide flexibility for timely action; court procedures should not compromise implementation of resolution measures. - Legal remedies under FDI Act are not explicitly limited to monetary compensation; no precedent exists of FDIC being removed as receiver or actions reversed. - Recommendation: Enhance FDI Act by empowering FDIC to override certain early termination rights for contracts of a resolved bank’s subsidiaries and affiliates. - State insurance laws typically do not provide safeguards against early termination rights in financial contracts; time needed to exercise resolution powers may not always meet KA timelines—extending OLA to insurers would address these weaknesses. - Recommendation: Identify all disclosure requirements that may warrant explicit and temporary disclosure exemptions under OLA and finalize related regulatory documentation. ### FUNDING IN RESOLUTION (KA 6) - DFA financing arrangements are consistent with KA: the Orderly Liquidation Fund (OLF) can borrow from the U.S. Treasury and be repaid from asset sale proceeds or, if insufficient, through risk-based assessments on the financial sector. - State insurance funding arrangements are not equipped to support resolution of systemically important insurers. - Nationwide system of guarantee funds legally required to protect policyholders, but not required to do so prior to insolvency. - Guarantee associations (GA) for life and health could, in principle, help finance pre-insolvency resolution measures such as portfolio transfer, but no certainty they would do so. - Funds can borrow from commercial banks or issue bonds, but not from the public sector under current legislation. - Liabilities of failed insurers are generally paid over an extended period from estate assets; unclear whether funds have financial capacity to address failure of a systemically important insurer. ### CROSS-BORDER COOPERATION (KA 7–9) - U.S. resolution regime is not aligned with FSB requirements on cross-border cooperation. - No general statutory mechanism exists to give prompt legal effect in the United States to foreign resolution actions. - Depositor preference rules subordinate claims from depositors at foreign branches of U.S. banks vis-à-vis claims from domestic depositors, which is not in line with the KA since it discriminates based on claim payment location. - Prospect of ring-fencing assets of U.S. branches of foreign institutions may undermine cross-border cooperation. - Crisis Management Groups (CMG) provide important forums for preparedness and cross-border resolution management. - CMGs enabled dialogue on recovery strategies, legal rights under U.S. and host regimes, firm-specific resolution strategies, and steps to improve resolvability. - CMG discussions have focused on the nature, amount and distribution of gone-concern loss absorbing capital required to recapitalize firms under OLA. - For systemically important insurers, CMG process is less advanced but progressing. - First phase of finalization of cross-border coordination agreements completed, involving 21 authorities from 11 jurisdictions for all seven U.S. G-SIBs with significant cross-border operations. - Recommendation: Align arrangements for coordination with host authorities from jurisdictions not represented on CMGs with FSB (draft) guidance. ### RECOVERY AND RESOLUTION PLANNING (KA 10–11) - Comprehensive framework exists for firm-developed resolution plans (“living wills”) to facilitate effective resolution. - Under DFA and FDIA, covered entities required to prepare and annually update plans: bank holding companies with consolidated assets of at least $50 billion; non-bank financial companies (NBFC) subject to FRB supervision (including systemically important insurance holding companies); and IDI with total assets of $50 billion. - Living wills enhance agencies’ understanding of firm structures and impediments to resolvability; support FDIC planning under OLA. - Regulatory guidance and firm-specific feedback support iterative improvements for banks; insurance-specific standards for recovery and resolution plans remain underdeveloped. - Insurance-specific guidance needed on identification of critical functions, appropriate capital structure for insurance groups, and development of appropriate resolution strategies. - A horizontal review of submissions from U.S.-based globally systemically important insurer (G-SII) could aid guidance development. - Applicability of SPE to insurance groups needs further analysis given location of loss absorbing capacity and links between liabilities and assets. - Shortcomings persist in firms’ plans that must be addressed decisively. - FRB and FDIC communication in August 2014 identified common weaknesses in the 2013 plans of the eleven largest banking groups: (i) unrealistic or inadequately supported assumptions; and (ii) failure to make or identify changes needed to enhance prospects for orderly resolution. - Affected organizations instructed to improve resolvability and update Title I resolution plans by July 2015. - Recommendation: Authorities should closely scrutinize firms’ plans and use enforcement powers if identified shortcomings are not addressed in a timely manner. ### ACCESS TO INFORMATION AND INFORMATION SHARING (KA 12) - U.S. bank and insurance resolution regimes provide adequate powers for agencies to access information material for planning, preparation and implementation of resolution measures, including via the recovery and resolution planning process. *Source: EXECUTIVE SUMMARY AND KEY FINDINGS (content unit _cr15171)* ### INTRODUCTION ### INTRODUCTION ### Review scope, process, and limitations - Review completed as part of the FSAP update; conducted from February 18 to March 9, 2015, by: - Ross Leckow and Alessandro Gullo (Legal Department, IMF), - Marc Dobler and Constant Verkoren (Monetary and Capital Markets Department, IMF), - Till Redenz and Masakazu Masujima (external experts engaged by the IMF). - Team reviewed the framework of laws, rules, guidance and arrangements in place as of the date of completion of the review, supplemented by information provided by the U.S. authorities as of May 2015. - Extensive meetings with U.S. officials and additional meetings with banking and insurance sector experts and stakeholders (including auditors, lawyers, and associations) took place. - The authorities agreed to be evaluated according to the revised draft KA AM dated 20 October 2014. - No ratings were assigned in this review because the AM will not be finalized until tested in other countries. - Consistent with the AM, the team did not have access to confidential recovery and resolution plans and made no judgment as to the resolvability of individual firms. ### Context and approach - The evaluation used a proportionate approach commensurate with the complexity, interconnectedness, size, risk profile and cross-border reach of the U.S. financial system. - A review of compliance with the KAs is judgment-based and not directly comparable across jurisdictions. ### A. Institutional and Market Structure—Overview - Financial sector assets equivalent to 480 percent of gross domestic product (GDP). - Eight U.S. G-SIBs account for 22 percent of the total assets of all the G-SIBs. - Depository institutions (mostly banks), pension funds, mutual funds and insurance companies account for around 70 percent of the financial sector assets. Banking sector - Banks hold 16 percent of all assets held by financial institutions. - The five largest banks account for about 45 percent of the U.S. banking system’s total assets (twice the share of 10 years ago). - Number of banks reached an all time low in first quarter of 2014. - Improvements in bank balance sheets and income statements observed: - Total number of firms on the FDIC’s problem bank list fell to 329 at end September 2014, from a peak of 888 in March 2011. These banks had combined assets of US$126 billion. - Banks now hold more liquid assets, grant fewer loans, hold fewer trading account assets, have attracted more deposits, hold more capital, and are less leveraged. - Profits have reached pre-crisis levels (in nominal terms) mainly due to lower provisions and lower interest expenses. - Comprehensive Capital Analysis and Review stress tests indicate that, if hit by a severe global market shock, banks’ capital ratios would fall significantly and banks would face sizable losses on their loan portfolios and trading activities. Insurance sector - U.S. insurance market is the largest in the world. - Insurance sector assets correspond to a half of banking sector assets. - There were 4,538 insurance companies reporting to the NAIC at the end of 2013. - Total premium volume in 2013 was $1.56 trillion, accounting for 33 percent of the global market. - Three main sectors: life, property and casualty (P&C), and health insurance. - Key specialist insurance lines: financial guaranty, mortgage insurance, and title insurance. - Insurance sector is less concentrated than in other industrialized countries. - Four large insurance groups (TIAA-CREF, State Farm Mutual, Nationwide Mutual and USAA) have deposit-taking institutions and are regulated by the FRB as Saving & Loan Holding Companies (SLHCs). - Three U.S. insurers—American International Group (AIG), MetLife, and Prudential—have been identified as G-SIIs by the Financial Stability Board (FSB). - Capital adequacy at the legal entity level, measured by regulators’ risk-based capital (RBC) requirements, has improved since the financial crisis. - Large life insurance groups have expanded non-traditional insurance products, often with guarantees that expose insurers to significant risk if economic growth falters or remains low for long. - Direct writers of life insurance, annuities and health products like disability income and long-term care face the greatest risk due to the long-term nature of their interest guarantees. Securities and derivatives markets - Nominal value of outstanding debt securities at end-2013: about $39 trillion (230 percent of GDP). - Corporate bonds, including Asset Backed Securities (ABS), accounted for a third of this: - Half of those were issued by non-financial corporations. - 10 percent by ABS issuers (down from 30 percent before the crisis). - Government-Sponsored Enterprises (GSE) backed securities segment is now larger than before the crisis. - Notional amount of outstanding derivatives contracts at end 2013: $237 trillion. - Based on derivatives activities of 1,383 insured US commercial banks and savings associations. - Market relatively stable since 2010. - Four large commercial banks represent 93 percent of the total banking industry notional amounts. - Derivative contracts concentration by type: - Interest rate products: 82 percent of total derivative notional amounts. - Swap contracts: 64 percent of all notional amounts. - Futures and forwards: 18 percent. - Options: 14 percent. ### B. Review of the Preconditions for Effective Resolution Regimes Precondition A: A well-established framework for financial stability, surveillance and policy formulation - Title I of the Dodd Frank Act (DFA) established the Financial Stability Oversight Council (FSOC). - FSOC charged with monitoring and identifying emerging risks to financial stability across the entire financial system, identifying potential regulatory gaps, and coordinating agencies' responses to potential systemic risks. - FSOC composition includes: the Treasury Secretary (chair); the heads of the three FBAs; the heads of the CFPB, SEC, CFTC, FHA, and NCUA; and an independent member with insurance expertise appointed by the President and confirmed by the Senate. - Members are advised by the Directors of the OFR and the FIO and by nominated representatives of state insurance commissioners, banking supervisors, and securities commissioners. - One FSOC task is designation of nonbank financial companies that could pose a threat to U.S. financial stability; designated firms are subject to consolidated supervision by the FRB and to enhanced prudential standards. - FSOC has designated four nonbank financial companies to date: AIG, General Electric Capital Corporation, MetLife, and Prudential Financial. - DFA requirements on stress testing: - FRB to conduct and publish summary results of annual stress tests of systemic nonbank financial companies and BHCs with $50 billion or more in assets. - Such companies required to conduct their own stress tests semiannually. - Financial companies with more than $10 billion in assets must conduct annual stress tests in accordance with regulations established by the respective primary FBA. Precondition B: An effective system of supervision, regulation and oversight of financial institutions Banking supervision and regulation - The United States operates under a “dual banking system”: federal or state charters. - Primary federal supervisory responsibilities (summary): - OCC: Charters, regulates, and supervises all national banks and federal savings associations and licenses and supervises federal branches and agencies of foreign banks. - FRB: Regulates and supervises state chartered banks that are members of the Federal Reserve System (“state member banks”); regulates and supervises any company that owns or controls a national or state bank; consolidated supervisor of all BHCs, FHCs and SLHCs. - FDIC: Regulates and supervises state banks that are not members of the Federal Reserve System (“nonmember banks”) and state chartered savings associations jointly with state banking authorities; has authority to examine any bank for deposit insurance purposes and “backup enforcement authority” over all banks. - FDIC’s “backup enforcement authority” means it can recommend another federal banking agency take action and may take such action directly if the other agency does not act. - Foreign banking organizations (FBOs): - No FBO may establish a branch or an agency without prior approval of the FRB. - All banks and branches or agencies of FBOs have a primary federal regulator. - If an FBO chooses a federal license for a branch or agency, it is supervised and examined by the OCC; if it elects a state license, it is typically examined by state banking authorities and the FRB on a joint or rotating basis. - Post-2010 DFA changes to legal and regulatory framework for banks include: - Enhanced prudential standards for large BHCs and systemically designated nonbank SIFIs; consolidated supervision of designated nonbank SIFIs; enhanced resolution powers for nonbank SIFIs; strengthened supervision of systemically important payment, settlement, and clearing utilities. - Tightened limitations on transactions between a BHC, a subsidiary bank, and its affiliates. - Incorporation of financial stability into analysis under the Bank Holding Company Act and the Bank Merger Act. - Incorporation of financial stability considerations into holding company supervision and eligibility to engage in expanded activities. - Elimination of many Gramm-Leach-Bliley Act limitations restricting the FRB’s ability to examine, obtain reports from, or take enforcement action against a functionally regulated subsidiary of a BHC. - Authorization for the FRB to examine activities of nonbank subsidiaries of holding companies (other than functionally regulated subsidiaries), subject to the same standards and frequency as if such activities were conducted in the organization's lead subsidiary depository institution. - Prohibition on conversion of a charter by a depository institution subject to a formal enforcement order with respect to a significant supervisory matter, except under certain circumstances. - Regulations require FBOs with U.S. non-branch assets of $50 billion or more to establish a U.S. intermediate holding company (IHC): - The IHC generally will be subject to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. - IHCs will include (with some exceptions) all U.S. bank and nonbank subsidiaries but not foreign branches. - IHCs will be subject to the Federal Reserve's rules requiring regular capital plans and stress tests. - Assessment of the Basel Core Principles for Effective Supervision (BCP) found: - FBAs have improved considerably in effectiveness since the previous FSAP but the system remains fragmented. - FBAs stepped up supervisory intensity, especially for large banking organizations, emphasizing capital planning, stress testing and corporate governance. - FBAs enhanced supervisory capacity, adding staffing numbers and skills. - High degree of compliance assigned under the BCP assessment. - Shortcomings observed in treatment of concentration risk and large exposures, but not raising concerns about authorities’ ability to undertake effective supervision. - Many BCP requirements are not established in law, regulation, or supervisory guidance but determined in practice by the supervisor. - Legislative reforms did not fundamentally address the fragmented regulatory system; multiple regulators with distinct but overlapping mandates remain, creating duplication of effort, and a new challenge with delineating responsibilities involving a stand-alone consumer protection agency. - Cooperation among FBAs has improved but substantial duplication of effort remains. *UNITED STATES — INTERNATIONAL MONETARY FUND* ### 19. Since the last FSAP, important changes have also taken place in the supervisory ### _cr15171 - 19. Since the last FSAP, important changes have also taken place in the supervisory ### Supervisory framework for insurance firms - Insurance sector regulation and supervision is primarily at the state level; contrast with banking sector. - Establishment of the FIO created a mechanism for identifying national priorities for reform and development. - FRB responsibilities were extended to cover consolidated supervision of insurance groups, strengthening supervision of affected groups (which now cover around 30 percent of total premium income in the United States). - State regulators: - State insurance departments carry out licensing, supervision and examination of insurance companies and intermediaries under powers set out in state legislation. - A commissioner heads the department and exercises all formal powers; some commissioners are elected, most are appointed by the state governor. - Funding is usually raised from the insurance markets via fees and levies; budgets are generally subject to the state budgeting process. - Insurance departments collect premium taxes for the states, which are a significant part of state governments’ revenues. - NAIC: - Serves as a regulatory support organization for state insurers to promote consistency across state regulation. - Through NAIC, state regulators establish model laws, regulations, best practices, and examination handbooks, and coordinate regulatory oversight. - NAIC has around 470 staff, compared with 11,529 employed by the states. - NAIC’s Financial Analysis Working Group is composed of 18 senior financial experts who review all “nationally significant companies” (around 1,600 companies, representing 85 percent of the market) based on annual and quarterly statements and other information. - Objective is to provide a peer review process for domestic state regulators, who retain responsibility for any action. - Implemented key reforms following the 2010 FSAP, including establishing supervisory colleges for all U.S. based internationally active insurance groups and increasing memoranda of understanding with international regulators. - FRB: - Given responsibility to regulate and supervise large nonbank financial groups (including insurance groups) as part of the post-2008 response. - Not responsible for licensing or regulating individual insurance companies, but has a role through consolidated regulation of: - (i) BHCs—to the extent there are one or more insurance companies as well as at least one bank in the group (there are no such groups at present); - (ii) SLHCs—to the extent there are one or more insurance companies as well as at least one savings and loan company in the group—there are 15 such groups at present, including four of the largest insurers in the country; - (iii) FSOC designated NBFCs that are, or have material subsidiary, insurance companies. - FIO: - Established in the Department of Treasury with a broad monitoring role of the insurance sector and its regulation, a lead role in international aspects of insurance regulation and specific responsibilities relating to systemic risk in the insurance sector. - Represents the United States in the International Association of Insurance Supervisors. - Has no authority to license or regulate insurance companies. - In December 2013, released a “Modernization Report” pursuant to Title V of the DFA, with 18 near-term recommendations for state regulators, nine recommendations with regard to direct federal involvement, and proposals for reform to increase federal oversight over the long term. ### Assessment of Insurance Core Principles and key supervisory gaps - Overall assessment found a reasonable level of observance of the standards. - Strengths: - Regulation benefits from a sophisticated legal entity capital adequacy approach (risk based capital or RBC). - Regulation and supervision conducted with a high degree of transparency and accountability. - FRB supervision enhances group-wide governance and risk management focus. - Peer group review and challenge through NAIC processes is a source of strength. - Lead state regulation is developing and a network of international supervisory colleges has been put in place. - Areas to address: - The valuation standard of the state regulators, especially for life insurance, and group capital standards. - Gaps in governance and risk management requirements and in market conduct and intermediary supervision. - Governance and funding arrangements for state insurance regulators. - The objectives of state regulators and scope for conflict between FRB objectives and policyholder protection. - The complex and fragmented regulatory system. ### Resolution framework for insurers and fragmentation concerns - Resolution fragmentation mirrors supervisory fragmentation: each of the 50 states has a distinct legal framework for insurance resolution and a distinct resolution authority (the state insurance commissioner). - NAIC has promoted greater uniformity via model insurance resolution laws; most states have based legislative frameworks on one of these models. - Example adoption patterns: approximately 35 states have adopted NAIC’s Insurance Holding Company System Regulatory Act; approximately six states have adopted the 2007 Insurer Receivership Model Act while 28 have adopted the 1977 Model Act. - Lack of complete harmonization could hinder resolution of a systemically important insurance group with multi-state operations. - State guaranty associations protect policyholders; all U.S. insurance companies required to be members of associations covering life and health insurance and, through separate organizations, property and casualty. - Associations established by state laws (based on NAIC model acts). - Payments are triggered by insurer insolvency and issuance of an order of liquidation. - Laws differ on extent of coverage and maximum amount per policyholder (between $100,000 and $500,000 depending on product and state). - Liabilities typically paid out over a number of years; associations rely primarily on estate assets and are not pre-funded. - State laws set limits on assessment—typically, at 2 percent per year of each insurer’s prior year premium income in the state. ### Precondition C — Protection schemes for depositors and policyholders (banking and insurance) - Banking sector: - Two federally-mandated deposit insurance schemes: FDIC for banks and savings associations (thrifts); NCUA for credit unions. - Coverage per depositor and institution up to statutory limit of $250,000 for each account ownership category. - Funds: FDIC manages the Deposit Insurance Fund (DIF); NCUA manages the National Credit Union Share Insurance Fund (NCUSIF); both backed by the “full faith and credit” of the U.S. Government. - Coverage is high by international standards; DFA permanently raised deposit insurance coverage to $250,000, equivalent to nearly five times per capita GDP. - Different account balances are not aggregated when determining coverage; depositors can secure higher total coverage by opening multiple accounts under different “ownership capacities.” - Deposit insurance fund experience: - DIF stood at $52.4 billion or 1.22 percent of insured deposits prior to the crisis, reached a deficit of $8.2 billion by end September 2009. - FDIC line of credit from the U.S. Treasury increased from $30 billion to $100 billion during the crisis. - Post-crisis reforms: DFA raised target minimum designated reserve ratio (DRR) to 1.35 percent (to be reached by end September 2020), from 1.15 percent (by 2016). - Removal of the “hard cap” at 1.35 percent allowed FDIC Board discretion to set a higher target without ceasing assessments; FDIC Board set a two percent target. - Credit union scheme is unchanged and requires reform. - Insurance sector: - Policyholders protected by state guaranty associations (life and health; property and casualty). - Coverage per policyholder varies between $100,000 and $500,000 depending on product and state. - Guaranty System not pre-funded; relies on estate assets and ex post assessments limited typically to 2 percent per year of prior year premium income. ### Precondition D — Accounting, auditing and disclosure - U.S. accounting standards (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB). - FASB and IASB are working on a convergence program to bring U.S. and international financial reporting standards into a single framework. - Financial statement audit requirements strengthened in 2002 with the Sarbanes-Oxley Act: - Enhanced audit scrutiny, tougher auditor independence requirements, required management attestations about reliability of financial accounts, and expanded disclosure requirements. ### Precondition E — Legal framework and judicial system - The United States has an independent judiciary and well-regulated accounting, auditing, and legal professions. - Judicial system comprises both federal and state systems; federal judges appointed by the President with Senate advice and consent and receive lifetime appointments. - State methods of judicial appointment vary; some mirror federal system, others use general election. - Lawyers require state licenses; all states but one (Wisconsin) require applicants not already members of another state’s bar to pass a bar examination. - States regulate the profession, often delegating to state bar associations; lawyers are subject to state ethical standards. ### Resolution regime reforms (Title II, OLA, and scope) - Title II of the DFA creates an OLA permitting the FDIC to be appointed as receiver for a failing systemically important financial company (a “covered financial company”) whose disorderly collapse would pose substantial risks to the financial system and broader economy. - Definition of “financial company” and scope of Title II application include: - (i) Bank holding companies; - (ii) Nonbank financial companies supervised by the FRB pursuant to section 113 of the DFA; - (iii) Financial companies predominantly engaged in activities that are financial in nature or incidental thereto as set forth in FRB regulations. - Subsidiaries (other than an IDI or an insurance company) may be resolved using OLA powers if predominantly engaged in financial activities. - Title II triggering (“three keys process”): recommendation of two-thirds of directors of both the FRB and the board of the FDIC and a determination by the Secretary of the Treasury, in consultation with the President, that inter alia the company is in default or in danger of default; failure would have serious adverse effects on financial stability; bankruptcy law resolution would not be appropriate; and OLA resolution would avoid or mitigate adverse effects. - SEC or FIO would substitute for FDIC in the “three keys” recommendation if firm or its largest domestic subsidiary is a broker-dealer or an insurance company, respectively, with FDIC consulted in both cases. - Title II powers for FDIC as receiver: - Stabilize the company with loans or guarantees, sell assets or operations, transfer assets and liabilities to a bridge company. - Requires FDIC to ensure creditors and shareholders bear losses and that directors and management responsible are removed. - Temporary funding via borrowing from the Treasury through the OLF is allowed subject to limits; borrowings must be repaid through sale proceeds of the failed company's operations. - If proceeds are insufficient, assessments would be made on certain creditors and, if necessary, on financial companies including bank holding companies with $50 billion or more in total assets, and nonbank financial companies supervised by the FRB. - Prohibition on taxpayers bearing any losses in a Title II receivership (DFA Section 214). - Types of institutions excluded from OLA resolution: - IDIs (banks and savings and loans associations) are excluded and resolved pursuant to the FDI Act. - U.S. branches of FBOs: uninsured branches must have state or federal license; federally licensed branches generally resolved under Federal law (IBA). The two largest federally licensed branches had assets of about $80 billion at end of September 2014. One grandfathered insured branch would be resolved under the FDI Act. Ten largest state-licensed branches by assets ranged from $78 billion to $150 billion at end September. - Insurance companies (as opposed to their holding companies) cannot be resolved using OLA powers and are not subject to the Federal Bankruptcy Code; insurers must be resolved pursuant to state legislation (receivership via conservation, rehabilitation or liquidation under the insurer’s domiciliary state law). - Title II provides that if the appropriate state regulator does not commence resolution of an insurance company within 60 days of a systemic risk determination by the Treasury Secretary with respect to the insurance company, then the FDIC shall have authority to stand in place of the appropriate regulatory agency and file the appropriate judicial action in the appropriate state court to place such company into orderly liquidation under state laws and requirements. *Italic: Extracted from IMF staff country report content unit _cr15171 (paragraphs 19–34).* ### 35. A comprehensive recovery or resolution planning process helps to promote ### _cr15171 - 35. A comprehensive recovery or resolution planning process helps to promote ### Recovery and resolution planning as a cornerstone of resolvability - Recovery planning is viewed by U.S. authorities as an integral part of the framework for the consolidated supervision of large financial firms. - Large financial firms are expected to prepare, and periodically update, plans for remedying potential financial or operational weaknesses via predefined recovery options. - Title I of the DFA mandates certain firms to produce rapid and orderly resolution plans under the U.S. Bankruptcy Code: - all BHCs with consolidated assets of at least $50 billion; and - each NBFC that is supervised by the FRB. - These Title I plans (“living wills”) provide the FDIC, in its capacity as receiver under OLA, with detailed understanding of: - firms’ structures; - critical functions and critical shared services; - intra-group financial linkages and funding sources. - Living wills inform: - resolvability assessments prepared by the FDIC for financial firms whose failure could adversely impact U.S. financial stability; and - FDIC planning for the exercise of its OLA under Title II of the DFA (and the FDI Act, as appropriate). - The FRB and FDIC’s power under Title I to require firms to take measures to remove obstacles to resolvability can contribute to achieving greater resolvability under OLA. ### FDIC Single Point of Entry (SPE) strategy - The FDIC has focused on developing an SPE strategy for deploying OLA powers. - SPE overview and mechanics: - SPE leverages the fact that most U.S. SIFIs are organized under a non-operating parent holding company structure (BHC or FHC), required to act as a “source of strength” to their banking subsidiaries. - Holding company balance sheets predominantly comprise long-term debt and investments and loans in subsidiaries; operating liabilities typically reside at the operating company (e.g., bank) level. - FDIC would initiate an OLA receivership at a single point — the top tier U.S. holding company — while operating subsidiaries (e.g., IDI, broker-dealer) would not be subject to a resolution proceeding. - FDIC would immediately establish a bridge financial company into which it would transfer the assets of the parent holding company, including: - ownership interests in operating subsidiaries; - intercompany loans to operating subsidiaries. - Rights related to equity, subordinated debt and senior unsecured debt of the holding company would be terminated, leaving only a residual claim on the receivership. - Under SPE, residual claims would be met through a securities-for-claims exchange six to nine months later, in a new (and listed) financial company, which would assume the assets and liabilities of the bridge bank. - Effect: bail-in of the creditors of the failed holding company and recapitalization of the group, via the parent bridge providing capital and liquidity as needed to subsidiaries. ### Practical challenges for SPE implementation - Key prerequisites and challenges identified: - Adequate capital and debt must be issued by the holding company so that sufficient quantities can be bailed-in to: - cover the group’s losses; - support subsidiaries; and - restore market confidence in the bridge and successor entity. - Cross-border effectiveness of resolution measures must be addressed. - Preservation of critical access to Financial Market Utilities is required. - Continuity of essential group operational services must be ensured (e.g., group treasury, human resources and IT services). - International and industry developments relevant to these challenges: - The FSB issued a proposal for minimum total loss absorbing capital (TLAC), including internal TLAC for G-SIBs. - The ISDA Resolution Stay Protocol was adopted by 18 global major banks; described as a positive development but further reforms are required. - Many remaining impediments are intended to be addressed through effective recovery and resolution planning. - Progress on these issues is essential for successful implementation of an SPE strategy under Title II. ### Insurance groups and potential need for MPE strategies - Insurance groups present distinct challenges relative to banks: - Insurance liability structures differ from banks and may lend themselves more to a multiple point of entry (MPE) resolution strategy, where different entities in the group (including operating-level entities) enter separate resolution proceedings. - Most loss absorbing capacity is at the level of operational insurance subsidiaries, oriented to protecting policy holders at the state level. - Recovery and resolution planning for insurance groups has seen much less progress. - Additional complications specific to insurance SIFIs include: - Extensive communication and coordination required between the FDIC, multiple state insurance regulators and potentially the insurance guaranty system to implement an SPE strategy. - The MPE strategy may be preferred or necessary for insurance groups in many cases. ### Detailed review scope, methodology and limitations - The detailed review that follows in the source evaluates consistency of the U.S. resolution regime for banking and insurance sectors with the Key Attributes (KA), with several caveats: - The review is based upon a draft rather than a final version of the assessment methodology. - The review pertains only to the banking and insurance sectors; certain essential criteria (EC) are not reviewed because they pertain to resolution of financial market infrastructures. - Multiple resolution regimes are relevant within banking and insurance; descriptions and findings address regimes applicable to: - “covered financial companies” under Title II of the DFA (which may include systemically important holding companies for banks and insurance companies, as well as nonbank/noninsurance company subsidiaries of those holding companies); - domestic banks under the FDI Act, and U.S. branches of FBOs under the IBA and New York state law (key jurisdiction for systemic branches) for KA 1 and 7; and - the state resolution regime for insurance companies. - Appendix I of the source summarizes the resolution regimes applying to different types of financial groups and companies in the United States; Figure 1 highlights the resolution regimes reviewed. - It could not be assumed that all systemic banking and insurance companies could be resolved at the holding company level using Title II (an MPE strategy may be preferred or necessary), therefore resolution regimes applicable at the operating company level were also reviewed. - Insurance resolution review specifics and constraints: - It is not possible to provide a complete or comprehensive picture of the state insurance resolution regime due to state-by-state variation. - The review relies on NAIC model laws, legislation of New York and New Jersey, and discussions with NAIC staff and representatives of state insurance departments of New York, New Jersey, California, Nebraska, Connecticut, Pennsylvania and Texas. - Conclusions are broad and must be viewed against these limitations. ### Timelines, the Assessment Methodology (AM) and applicability to insurance - The AM and insurance annex to the KAs were consulted for the insurance resolution review. - The AM envisages an administrative authority vested with broad powers to act quickly to resolve any financial institution that could be systemically important or critical at failure. - The AM acknowledges that court order or confirmation may be provided for the exercise of resolution powers but cautions that such requirements must not impede rapid intervention and achievement of resolution objectives. - Observations specific to U.S. insurance context: - Time-lines required for court approval in the U.S. insurance resolution context may not, in all cases, enable the rapid intervention envisaged under the KA. - The AM only recognizes the need for longer timelines in an insurance resolution to effect a portfolio transfer or a run off; otherwise it assumes the same timeframes should apply to systemic insurance companies and banks for the exercise of resolution powers. - Extended timeframes may be appropriate for some resolution powers (policy transfer and run off) but may be insufficient for other powers that need urgent application (e.g., transfer of qualified financial contracts (QFCs) of systemic entities). - The challenges of applying the draft AM to insurance companies are noted: - Debate remains on whether the KA and the AM need further modification to address insurance-specific features. - Unclear whether all resolution powers envisaged in KA 3 (e.g., asset management companies) are necessary for insurance resolutions, or whether all objectives of resolution in KA 2 are appropriate for insurance. - These questions may require further international discussion, including by the FSB’s Cross-border Crisis Management Group for Insurers. *Source: IMF staff report section 35–41 (detailed review and analysis of U.S. recovery and resolution planning, SPE strategy, TLAC discussion, and insurance resolution challenges).* ### 1. Scope ### 1. Scope ### Scope requirements (KA1.1; KA1.3) - Any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime that has the attributes set out in the Key Attributes. - The regime should be clear and transparent as to the financial institutions (hereinafter “firms”) within its scope. It should extend to: - (i) holding companies of a firm; - (ii) non-regulated operational entities within a financial group or conglomerate that are significant to the business of the group or conglomerate; and - (iii) branches of foreign firms. - The resolution regime should require that at least all domestically incorporated global SIFIs (“G-SIFIs”): - (i) have in place a recovery and resolution plan (“RRP”), including a group resolution plan, containing all elements set out in Annex III; - (ii) are subject to regular resolvability assessments; and - (iii) are the subject of institution-specific cross-border cooperation agreements. ### Essential criterion EC1.1 — Legal definitions and circumstances for Title II resolution - EC1.1: The scope of application of the resolution regime and the circumstances in which it applies are clearly defined in the legal framework. Any financial institution that could be systemically significant or critical in the event of failure is subject to a resolution regime. - Description and findings re EC1.1: - DFA: The legal framework defines the scope of application of the resolution regime for systemic financial companies, and the circumstances in which it applies, under Title II of the DFA. - The definition of financial companies encompasses: - (i) bank holding companies; - (ii) non bank financial companies supervised by the Federal Reserve Board under Title I of the DFA; - (iii) companies predominantly engaged in activities that are financial in nature or incidental thereto, as determined by Federal Reserve Board; and - (iv) subsidiaries of companies referred under (i) through (iii) above, other than insured depository institutions or insurance companies, predominantly engaged in activities that are financial in nature or incidental thereto, as determined by Federal Reserve Board. - The circumstances in which the resolution regime for systemic financial companies applies are set forth under Title II and are linked to the systemic importance of such companies in the event of failure. - Title II applies where a systemic risk determination has been made by the Treasury Secretary that, among other things: - the company satisfies the definition of a financial company; - such financial company is in default or in danger of default; - no viable private sector alternative is available to prevent the default of the financial company; - its failure and resolution under otherwise applicable federal or state law would have serious adverse effects on financial stability in the U.S.; and - any exercise of the orderly liquidation authority would avoid or mitigate such adverse effects. - Such determination is made by the Treasury Secretary in consultation with the President, upon a recommendation made by the FDIC and the Federal Reserve Board (either on their own initiative or at the request of the Treasury Secretary). Following such determination, and subject to judicial review by the U.S. District Court for the District of Columbia, the FDIC is appointed receiver for the financial company (the “covered financial company”) and can apply the resolution powers under Title II. - When the FDIC has been appointed as a receiver for a financial company under Title II, it may also appoint itself as receiver for a “covered subsidiary” (i.e. a subsidiary of a covered financial company other than an insured depository institution, an insurance company or a covered broker-dealer), upon a joint determination by the FDIC and the Treasury Secretary based on financial stability grounds. The FDIC can exercise in respect of such subsidiary all powers and rights that it has with respect to a covered financial company under Title II. - Specific issues regarding insurance companies under DFA: - Holding companies of insurance groups fall within the definition of “financial company” and can be subjected to the resolution regime for systemic financial companies under Title II. However, the resolution regime for insurance companies under Title II differs from that applicable to other types of companies: - A recommendation to treat an insurance company as a “covered financial company” is made by the Director of the Federal Insurance Office (as opposed to the FDIC) and the Board of Governors, at the request of the Secretary or on their own initiative. - An insurance company that is a “covered financial company” will be subjected to rehabilitation or liquidation under applicable state law rather than the resolution regime specified for other types of financial companies under Title II. State resolution law will also apply to any subsidiary or affiliate of the insurance company that is itself an insurance company. - Consequently, different parts of a systemically important insurance group may be conducted under different resolution regimes: the holding company may be resolved under Title II while insurance company subsidiaries are resolved under applicable state resolution law. If multiple insurance company subsidiaries incorporated in different states are involved, all relevant state Commissioners will be involved. - Banking and FDI Act: - The scope of application of the resolution regime for insured depository institutions is defined under the FDI Act, which provides for the appointment of the FDIC as receiver for Federal and state insured depository institutions on certain grounds. - Insured depository institutions are defined to include any bank or savings association, the deposits of which are insured by the FDIC. - The grounds for the appointment of the FDIC as a receiver do not necessarily entail that such institutions be systemic or critical in the event of failure. - State insurance: - State insurance receivership laws generally provide for conservatorship, rehabilitation, or liquidation of the relevant insurance company, commenced and carried out by the relevant state insurance commissioner with state court approval. - Findings under EC1.1: - For the bank resolution regime, the scope and circumstances are clearly defined under both the DFA and the FDI Act. - Several unresolved questions arise from the treatment of insurance companies that are “covered financial companies” under Title II and the relationship between Title II and state insurance resolution law: - It is unclear whether state resolution proceedings may commence immediately after a Title II determination or only when the company has also crossed the relevant threshold under state law for receivership. - It is unclear whether the state receivership proceeding would only need to be conducted in accordance with objectives for receivership under state law or whether the objectives for orderly liquidation under DFA would also apply. - Where the state commissioner fails to take the “appropriate judicial action” within 60 days of a systemic risk determination, the precise role of the FDIC in exercising the “backup authority” under Section 203 (e)(3) is unclear: while the FDIC “shall have the authority” to stand in the place of the relevant regulatory agency and to file the relevant judicial action, it is unclear whether the FDIC would be limited to initiating the proceeding (with the relevant state authority then taking over conduct) or whether it would assume conduct of the proceeding through to its conclusion. - Recommendation: It is recommended that DFA be amended to subject systemically important insurance companies to the same resolution regime applicable to other covered financial companies. (See also recommendation in EC 2.1). ### Essential criterion EC1.2 — Entities within scope (holding companies, non-regulated operational entities, domestic branches) - EC1.2: The scope of the resolution regime covers the following entities located within the jurisdiction: - (i) holding companies of firms; - (ii) non-regulated operational entities within a financial group or conglomerate that are significant to the business or continuity of the firm’s critical operations; and - (iii) domestic branches of foreign firms. - Description and findings re EC1.2: - DFA: The definition of “financial company” to which Title II applies (subject to a systemic risk determination by the Treasury Secretary) includes bank holding companies, nonbank financial companies supervised by the FRB as determined by the FSOC under Section 113 of the DFA, and companies predominantly engaged in activities that the Federal Reserve Board has determined are financial in nature or incidental thereto. The definition therefore encompasses, but goes beyond, the perimeter of non bank financial companies subject to FSOC determination under Section 113. - A company can qualify as engaged in activities that are financial in nature or incidental thereto, if at least 85 percent of its total consolidated revenues are derived, directly or indirectly, from financial activities. Financial activities include “insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities.” (12 C.F.R. § 380.8) - Title II may also apply to certain subsidiaries of financial companies predominantly engaged in activities that are financial in nature or incidental thereto, subject to a systemic risk determination. When the FDIC has been appointed as a receiver for a financial company under Title II, it may appoint itself—through a joint determination with the Treasury Secretary—as receiver for a subsidiary (other than an insured depository institution, an insurance company or a broker-dealer) of such company. - Entities that are subsidiaries and are not regulated operational companies (e.g., IT companies) might in principle be captured by this provision of the DFA, if the relevant grounds are met (e.g., default or danger of default of the entity, and the appointment would mitigate the risk to U.S. financial stability). Upon commencement of an orderly liquidation under Title II the FDIC takes over the assets of and operates the covered financial company with all the powers of the members or shareholders, the directors, and the officers of the company, and conducts all business. This may allow the FDIC to operate the business of the subsidiaries—including non-operational entities—controlled by the covered financial companies. - Banking: The FDI Act scope includes insured depository institutions. The FDIC is authorized to take over the assets and business of IDIs, with similar considerations for non-regulated operational entities as under Title II. - Domestic branches of foreign banks: - Federally licensed domestic branches of foreign banks are resolved under Federal law, specifically under the regime set forth by the IBA. State licensed branches are resolved under applicable state laws. - Certain shortcomings characterize these regimes as liquidation (rather than resolution) oriented and may not allow achievement of a cooperative solution in a cross-border resolution (see Key Attribute 7, EC 7.4). - As of December 19, 1991, foreign firms may not establish insured branches in the U.S.; insured branches operating as of that date were permitted to continue operating—52 branches were grandfathered as of that date, and the number of insured branches is currently 10. These insured branches are resolved by the FDIC under the FDI Act. - State insurance: Under State receivership law, where an insurance company has been placed into receivership, an affiliate of the company that is not placed into receivership can be subject to the jurisdiction of the receivership court in limited circumstances to prevent usurpation of property of the receivership or interference, but the court would not appear open to exercise resolution powers with respect to the legally separate affiliate. The receiver may, by virtue of its control of the subsidiary, ensure that essential services continue to be provided to the parent in receivership. - Resolution of U.S. branches of foreign insurance companies is a matter of State law; generally such branches are liquidated as if they were separate legal entities with the proceeds of liquidation used to satisfy claims of creditors to the branch. - Findings under EC1.2: - The U.S. resolution regime covers a broad spectrum of entities. However: - Non-regulated operational entities that are not predominantly engaged in activities that are financial in nature might only be covered by the resolution regime through the ownership link with covered financial companies, covered subsidiaries, and IDIs that are subject to resolution under Title II or the FDI Act. - Such an ownership link may not always exist (for instance, in case of a company under joint control such as under joint venture agreements) or be operationalized (e.g., when a controlled company is itself subject to an insolvency proceeding, with the bankruptcy trustee having to respond to a different set of duties). In these cases, the resolution regime would not cover non-regulated operational entities. (See also recommendations made under 3.4.) - The regime for domestic branches of foreign firms is liquidation (rather than resolution) oriented. ### Assessment of KA1 and final recommendations - Comments: - The U.S. legal framework defines multiple resolution regimes that could potentially be applied to financial institutions that could be systemically significant or critical in the event of failure, including the DFA, the FDI Act, the IBA and state banking laws (with respect to state-licensed branches of foreign banks), and state insurance receivership laws. - Of the various regimes, the DFA and the FDI Act are most closely aligned with the Key Attributes. - For these regimes, the scope of application of the resolution regime and the circumstances in which it applies are generally clear, except that certain non-regulated operational entities may not be covered and the relationship between DFA Title II and state insurance resolution law is unclear. - To ensure that all financial institutions that could be systemically significant or critical in the event of failure can be resolved in accordance with a framework consistent with the Key Attributes: - It is recommended that the DFA be amended so that systemically important insurance companies and U.S. branches of foreign banks are subject to a Title II resolution regime similar to that applicable to any other “covered financial companies”. - For branches, this should be made in a manner that takes into account the specificities of branches, which are not legal entities, and the need to ensure coordination with foreign resolution authorities in line with KA 7. *Source: _cr15171 - 1. Scope* ### 2. Resolution Authority ### 2. Resolution Authority ### Key Attributes (KA2.x) — Responsibilities and Powers - KA2.1: Jurisdictions should have a designated administrative authority or authorities responsible for exercising resolution powers (“resolution authority”). Where there are multiple resolution authorities their respective mandates, roles and responsibilities should be clearly defined and coordinated. - KA2.2: Where different resolution authorities are in charge of resolving entities of the same group within a single jurisdiction, the regime should identify a lead authority to coordinate resolution of the legal entities within that jurisdiction. - KA2.3: As part of statutory objectives and functions, and where appropriate in coordination with other authorities, the resolution authority should: - (i) pursue financial stability and ensure continuity of systemically important financial services, and payment, clearing and settlement functions; - (ii) protect, where applicable and in coordination with relevant insurance schemes and arrangements, depositors, insurance policy holders and investors as covered by such schemes and arrangements; - (iii) avoid unnecessary destruction of value and seek to minimize the overall costs of resolution in home and host jurisdictions and losses to creditors, where consistent with other statutory objectives; - (iv) duly consider the potential impact of resolution actions on financial stability in other jurisdictions. - KA2.4: Resolution authority should have the authority to enter into agreements with resolution authorities of other jurisdictions. - KA2.5: Resolution authority should have operational independence, transparent processes, sound governance, adequate resources, rigorous evaluation and accountability mechanisms, and the expertise, resources and operational capacity to implement resolution measures for large and complex firms. - KA2.6: Resolution authority and its staff should be protected against liability for actions and omissions made while discharging duties in good faith, including actions in support of foreign resolution proceedings. - KA2.7: Resolution authority should have unimpeded access to firms where material for resolution planning and implementation. ### Essential Criteria (EC2.x) — Description and Findings - EC2.1: Legal framework identifies one or more resolution authorities and provides clear mandate; where multiple, identifies lead authority and coordination arrangements. - Findings and description: - Title II (DFA) sets a multi-step process involving several authorities, leading to appointment by the Treasury Secretary of the FDIC as receiver for a covered financial company. - Title II aims to liquidate failing financial companies posing significant risk to U.S. financial stability, mitigating moral hazard so creditors and shareholders bear losses and management is not retained. - Procedures and division of responsibilities between Federal and State authorities for insurance groups under Title II remain unclear: - FDIC may intervene at holding company level for insurance groups under Title II, but resolution of insurance companies is conducted under State law. - If a State commissioner fails to take “appropriate judicial action” within 60 days of a systemic risk determination, the FDIC “shall have the authority” to stand in place of the relevant regulatory agency and file the relevant judicial action. - Federal and State authorities have not clarified whether FDIC would only initiate proceedings then step aside or take full conduct of the proceeding when acting under backup authority. - No concerted, finalized procedures for cooperation in the period before and within the 60 day window. - NAIC Guideline for Implementation of State Orderly Liquidation Authority (MDL#1700) contemplates a State commissioner petition with an expedited (i.e., 24 hour) hearing, but procedures not yet agreed/implemented at State level. - FDIC, as receiver, is required to consult with primary financial regulatory agencies and coordinate treatment/resolution of subsidiaries. - FDIC authority can facilitate coordination by acting as receiver for covered financial company and, subject to circumstances, for subsidiaries. - Banking: FDIC is resolution authority for all insured depository institutions (IDIs) under the FDI Act; state or OCC appoints receiver for foreign bank branches depending on licensing. - State Insurance: State commissioner designated as receiver; state laws enable commissioner to marshal insurer assets and coordinate with guaranty associations (NOLHGA, NCIGF). Interstate receivership arrangements exist but are inconsistent across states; IRMA (2005) provides full faith and credit across states but some earlier models still apply. - Findings: - FDIC mandate as resolution authority is clearly defined in line with EC2.1; recommendation to finalize procedural, internal rules guiding interaction among U.S. authorities. - Procedures and division of responsibilities for insurance group resolution under Title II are uncertain; recommendation for Federal and State authorities to clarify roles. - State insurance regime clearly defines commissioner and receivership court responsibilities, but small risk exists that domiciliary receiver actions may not be supported in every state. - EC2.2: Statutory objectives/functions of resolution authority include KA2.3 objectives; where court involvement required, objectives align. - Description and findings: - Under Title II the FDIC shall: - determine action necessary for U.S. financial stability and not to preserve the covered financial company; - ensure shareholders receive payment only after all other claims and the Orderly Liquidation Fund are fully paid; - ensure unsecured creditors bear losses per Title II priority provisions; - ensure management responsible for failure is removed; - ensure board members responsible for failure are removed; - not take an equity interest in or become a shareholder of any covered financial company or covered subsidiary. - DFA prescribes no taxpayer funds used to prevent liquidation and no taxpayer losses from Title II; FDIC shall maximize net present value return from sale/disposition, minimize loss amount, and mitigate serious adverse effects to financial system. - FDIC can succeed to all rights/titles/powers of covered company to ensure continuity, can transfer QFCs, establish bridge institution, allow netting contract rights, and make funding available to receivership (may include funding for continuation of operations). - FDIC shall coordinate to maximum extent possible with appropriate foreign regulatory authorities regarding resolution of failed financial companies with foreign assets/operations. - Appointment of FDIC as receiver under Title II is subject to review by U.S. District Court for the District of Columbia; court decides confidentially whether Treasury Secretary’s determination is arbitrary and capricious; if court does not decide within 24 hours of receipt, liquidation under Title II automatically commences. - Unclear whether state receivership objectives or DFA orderly liquidation objectives apply when FDIC exercises backup authority for insurance companies. - Banking: FDIC under FDI Act may not use certain resolution powers in connection with an IDI unless it determines (i) necessary to meet FDIC insurance obligations; and (ii) total amount of FDIC expenditures/obligations incurred is the least costly to the deposit insurance fund of all possible methods (least cost test). Least cost test may be overridden if Treasury Secretary determines, upon written recommendation of FDIC and Federal Reserve Board, that compliance would have serious adverse effects on economic conditions or financial stability and alternate action would avoid/mitigate adverse effects. - FDIC shall conduct receiver operations to (i) maximize net present value return from sale/disposition of failed IDI assets; (ii) minimize loss realized in resolution. - FDIC administers DIF; payment of insured deposits made as soon as possible after liquidation either in cash or by making transferred deposit available. - FDIC powers analogous to Title II provisions exist under FDI Act (transfer QFCs, bridge institutions, succeed to rights/titles/powers). Once appointed receiver of failed IDI, FDIC not subject to direction of any other agency or state in exercise of its rights/powers. - State Insurance: State resolution objective is protection of policyholders, creditors and general public; does not explicitly focus on broader financial stability or preservation of critical functions except as encompassed within protection of policyholders/creditors/public. Avoiding unnecessary destruction of value and minimizing costs/losses are within legislative objectives. State frameworks do not appear to require consideration of impact on financial stability in other jurisdictions. - Findings: - FDIC statutory objectives/functions broadly align with KA2.3 (preservation of financial stability, protection of depositors, minimization of losses); DFA requires FDIC to coordinate to maximum extent possible with appropriate foreign regulatory authorities. - Title II and FDI Act provide objectives/responsibilities to ensure continuity of critical banking services; FDIC duty to minimize losses in resolution; court review under short timeframe (24 hours) aligns with KA2.3. - Objectives for Title II proceedings involving insurance companies are unclear due to interaction between state receivership objectives and DFA orderly liquidation objectives. - State insurance regimes focus principally on protection of policyholders rather than broader financial stability. - EC2.3: Resolution authority is operationally independent by law and practice; safeguards against undue political or industry influence (internal governance, appointment/dismissal rules, conflicts of interest). - Description and findings: - FDIC is an independent regulatory agency; managed by five-member board: three appointed by President with Senate advice/consent for six year terms (one designated Chairman for five year term); other members are Comptroller of the Currency and Director of the CFPB, each appointed for five year terms. No more than three board members from same political party. Statute does not specify grounds for removal; FDIC’s position is directors may be removed only for cause. Employees must meet minimum standards (12 C.F.R. Part 336.4 and 336.5); dismissal of senior management subject to rules including breach of ethical standards. - Directors may not hold stock in or act as officer/director of an IDI or bank holding company. Employees comply with supplemental standards of ethical conduct (5 C.F.R. Part 3201). - General authority to take resolution measures lies with Board of Directors, which can delegate tasks to divisions (e.g., Division of Resolution & Receiverships). - Under Title II, other authorities (Treasury Secretary, Federal Reserve Board, court) have roles in commencing resolution process with criteria/safeguards and checks and balances. - State insurance commissioners can perform independently and are subject to court supervision as receivers; internal governance arrangements typically include conflict of interest rules; NAIC accreditation program mitigates political influence risk. - Qualifications for state commissioner often specified by statute; rules typically prohibit appointment of persons connected with management/control of insurance companies; commissioners and staff prohibited from ownership/interest/dealings with licensed insurers. - Findings: - FDIC subject to rules/procedures ensuring operational independence and autonomy from industry and political interference. - State insurance commissioners have effective governance arrangements and judicial oversight in receivership performance. - EC2.4: Resolution authority is accountable via transparent framework including procedures for reviewing/evaluating actions and periodic publication of reports on resolution actions/policies. - Description and findings: - FDIC required to submit to Congress an annual report on operations, activities, budget, receipts/expenditures for preceding twelve-month period, including analysis of DIF condition, purpose/effect/estimated cost of each resolution action for an IDI during preceding year, and estimate of resources needed for DIF statutory purposes. - Before each fiscal quarter FDIC must provide Treasury Secretary a copy of financial operating plans/forecasts; at end of each fiscal quarter submit FDIC financial condition report to Treasury Secretary. - FDIC subject to external review by Government Accountability Office; annual audit by Comptroller General; Congressional oversight including inquiries and hearings. - Specific statutory reporting requirements exist for FDIC in relation to certain resolution actions under FDI Act or Title II. - FDIC internal auditor, Office of Inspector General, shall perform (i) material loss reviews of DIF as result of failure of an IDI; and (ii) semi-annual audits and investigations of liquidation of any covered financial company under Title II. - Within 24 hours of FDIC appointment as receiver for a covered financial company under Title II, Treasury Secretary shall provide certain Senate and Congress members written notice of recommendations and determinations. FDIC as receiver shall file report to certain Senate and Congressional Committees within 60 days of appointment on financial condition of covered financial company and plan/actions to wind down company. - If FDIC requires more than three years to resolve a covered financial company under Title II, Chairperson must certify to certain Senate and Congressional Committees necessity of continuation to protect U.S. financial system stability. - FDIC decisions as receiver with respect to claims subject to judicial review; after exhausting administrative claims process, federal courts have jurisdiction over de novo review. - State Insurance: Commissioner as supervisor and receiver subject to accountability; periodic reports to Governor or state legislature; principal accountability in receivership arises from court involvement — most receiver actions subject to court approval after notice/hearing; receiver normally required to make periodic reports to court (e.g., IRMA section 117 requires report within 180 days after entry of order and at least quarterly thereafter, including financial statements). Guaranty associations must file periodic reports to liquidator for inclusion in liquidator’s reports to receivership court. - Findings: - FDIC subject to numerous robust accountability requirements enabling ongoing and ex post review of actions. - State insurance commissioners, as court-appointed receivers, are subject to comprehensive court oversight and periodic reporting. - EC2.5: Resolution authority has adequate human and financial resources or access to such resources sufficient to carry out resolution functions effectively without undermining independence, before and during a crisis. - Description and findings: - FDIC employs approximately 6,700 people. - Post-DFA FDIC internal organization revised: Office of Complex Financial Institutions (OCFI) and Division of Resolutions & Receiverships have, respectively, 79 and 25 positions authorized to address FDIC responsibilities under DFA. A legal division section with 27 employees provides primary support to OCFI and other FDIC divisions on DFA matters. Division Risk Management Supervision (RMS) has a Complex Financial Institutions branch with 110 employees, mostly senior. - FDIC has professional training programs including DFA-related matters. - FDIC corporate operations funded by Deposit Insurance Fund (DIF) via assessments on IDIs. Receiver operations of failed IDIs funded by assets of failed IDI and, if necessary, DIF. FDIC Title II operations funded by assets of failed financial company and, if necessary, the Orderly Liquidation Fund. FDIC authorized to borrow from U.S. Treasury if necessary for insurance purposes. - Reasonable implementation expenses of FDIC incurred implementing Title II are treated as FSOC expenses; FSOC expenses funded through assessments on bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies supervised by the Federal Reserve Board. - State Insurance: States vary in approaches; some lack specialized internal units; many hire external experts (lawyers, accountants, appraisers) on contractual basis. Receivership expenses primarily funded from assets of the estate; if guaranty associations involved, expenses funded from estate assets and assessments among insurers in particular states. - Findings: - FDIC equipped with adequate human and financial resources to carry out functions effectively. - Organization and resources of state insurance receivers vary significantly; while adequate for most past receiverships, sufficiency to deal with failure of a systemically important insurer remains to be determined. - EC2.6: Legal framework provides legal protection through statute for resolution authority, its head, members and staff and agents against liability for actions/omissions in good faith, including indemnification for defense costs. - Description and findings: - Liability regime for FDIC and officials provided under Federal Tort Claims Act (FTCA), which waives sovereign immunity in certain tort cases but contains exceptions including discretionary function exception. Remedy under FTCA exclusive of other civil actions for same subject matter. - A director/member/officer/employee of FDIC has no liability under Securities Act of 1933 for acts/omissions within scope of employment in connection with disposition of assets by FDIC. - FDIC Indemnification Policy (Circular 5000.1): FDIC will indemnify present or past directors/officers/employees against liability and expenses incurred in connection with claims for wrongful acts arising from their FDIC role. - State Insurance: IRMA Section 115 alternatives provide official/judicial immunity or indemnification for subject persons; indemnification generally from assets of insurer unless act was outside duties or intentional/willful and wanton misconduct. These protections are not present in all states’ laws. - Findings: - FDIC enjoys adequate legal protection in line with EC2.6 recommendations. - Degree of legal protection under state insurance regimes varies; some states provide protection for commissioner and assistants/contractors, while others have not incorporated such protections into legislation. - EC2.7: Resolution authority has unimpeded access to domestic premises of firms where material for resolution planning and implementation. - Description and findings: - FDIC access for resolution planning via special examination authority with respect to any IDI, affiliate of an IDI, nonbank financial company supervised by Federal Reserve Board, and any bank holding company with total consolidated assets equal to or greater than $50 billion. - Special examination authority may be exercised for nonbank financial companies or bank holding companies with total consolidated assets equal to or greater than $50 billion only when such entities are not in a generally sound condition; otherwise FDIC would rely on information sharing with relevant federal regulators. - Upon appointment as receiver, FDIC succeeds to all rights/titles/powers/privileges and assets, enabling access to domestic premises. - State Insurance: Under Insurance Holding Company System Regulatory Act (IHCA, MDL#440), commissioner has power to examine insurer and affiliates to ascertain financial condition of group; provisions useful but do not directly address resolution planning. - Findings: - FDIC has unimpeded access to domestic premises of firms in resolution. - Access for resolution preparation: unimpeded for IDIs; significant constraint for nonbank financial companies or bank holding companies which must not be in a generally sound condition for FDIC special examination authority to apply — FDIC may rely on information sharing with federal regulators otherwise. - State insurance commissioners have access to insurer group information generally, rather than specifically for recovery and resolution planning. ### Assessment and Recommendations (KA2) - Assessment summary: - FDIC mandate as a key resolution authority is clearly defined; statutory objectives/functions broadly align with Key Attribute 2. - FDIC enjoys robust accountability, transparency and legal protections; adequate human and financial resources are in place. - State insurance resolution frameworks focus principally on protection of policyholders, creditors and the public, and do not explicitly prioritize broader financial stability or preservation of critical functions except insofar as those objectives are indirectly served. - Significant uncertainties remain regarding allocation of roles and responsibilities between Federal and State authorities in resolution of insurance groups under Title II. - Recommendations: - Finalize procedural, internal rules detailing interaction among various Federal authorities involved in commencement of a Title II proceeding (the “three key process”). - Clarify roles and responsibilities between Federal and State authorities in resolution of an insurance group under Title II, including with respect to triggers, objectives, coordination mechanisms and funding sources — pending implementation of recommendation in KA 1 to extend DFA scope to cover insurance companies. - Determine adequacy of state insurance receivers’ organization and resources to manage failure of a systemically important insurer. *Source: IMF assessment text, “2. Resolution Authority” from _cr15171 - 2. Resolution Authority.* ### 3. Resolution Powers ### 3. Resolution Powers ### Initiation and timing of resolution - Resolution should be initiated when a firm is no longer viable or likely to be no longer viable, and has no reasonable prospect of becoming so (KA3.1). - The regime should provide for timely and early entry into resolution before a firm is balance-sheet insolvent and before all equity has been fully wiped out (KA3.1). - There should be clear standards or suitable indicators of non-viability to guide decisions on entry into resolution (KA3.1). ### Core resolution powers (KA3.2) Resolution authorities should have a broad range of powers, including powers to: - Remove and replace the senior management and directors and recover monies from responsible persons, including claw-back of variable remuneration (KA3.2(i)). - Appoint an administrator to take control of and manage the affected firm with the objective of restoring the firm, or parts of its business, to on-going and sustainable viability (KA3.2(ii)). - Operate and resolve the firm, including powers to terminate contracts, continue or assign contracts, purchase or sell assets, write down debt and take any other action necessary to restructure or wind down the firm’s operations (KA3.2(iii)). - Ensure continuity of essential services and functions by requiring other companies in the same group to continue to provide essential services to the entity in resolution, any successor or an acquiring entity; ensure that the residual entity in resolution can temporarily provide such services to a successor or an acquiring entity; or procure necessary services from unaffiliated third parties (KA3.2(iv)). - Override rights of shareholders of the firm in resolution, including requirements for approval by shareholders of particular transactions, to permit a merger, acquisition, sale of substantial business operations, recapitalization or other measures to restructure and dispose of the firm’s business or its liabilities and assets (KA3.2(v)). - Transfer or sell assets and liabilities, legal rights and obligations, including deposit liabilities and ownership in shares, to a solvent third party, notwithstanding any requirements for consent or novation that would otherwise apply (KA3.2(vi)). - Establish a temporary bridge institution to take over and continue operating certain critical functions and viable operations of a failed firm (KA3.2(vii)). - Establish a separate asset management vehicle and transfer to the vehicle for management and run-down non-performing loans or difficult-to-value assets (KA3.2(viii)). - Carry out bail-in within resolution to recapitalise the entity hitherto providing essential functions or to capitalise a newly established entity or bridge institution to which those functions have been transferred (KA3.2(ix)). - Temporarily stay the exercise of early termination rights that may otherwise be triggered upon entry of a firm into resolution or in connection with the use of resolution powers (KA3.2(x)). - Impose a moratorium with a suspension of payments to unsecured creditors and customers (except for payments and property transfers to central counterparties (CCPs) and those entered into the payment, clearing and settlements systems) and a stay on creditor actions to attach assets or otherwise collect money or property from the firm, while protecting the enforcement of eligible netting and collateral agreements (KA3.2(xi)). - Effect the closure and orderly wind-down (liquidation) of the whole or part of a failing firm with timely pay-out or transfer of insured deposits and prompt (for example, within seven days) access to transaction accounts and to segregated client funds (KA3.2(xii)). ### Transfers and non-consensual transfers (KA3.3) - Resolution authorities should have the power to transfer selected assets and liabilities of the failed firm to a third party institution or to a newly established bridge institution (KA3.3). - Any transfer of assets or liabilities should not: - require the consent of any interested party or creditor to be valid (KA3.3(i)); and - constitute a default or termination event in relation to any obligation relating to such assets or liabilities or under any contract to which the failed firm is a party (KA3.3(ii)). ### Bridge institutions (KA3.4) Resolution authorities should have powers to establish one or more bridge institutions that include: - Power to enter into legally enforceable agreements transferring selected assets and liabilities of the failed firm to the bridge institution (KA3.4(i)). - Power to establish terms and conditions under which the bridge institution can operate as a going concern, including how it obtains capital or operational financing and other liquidity support; the prudential and other regulatory requirements; selection of management and corporate governance; and performance of temporary functions prescribed by the authority (KA3.4(ii)). - Power to reverse, if necessary, asset and liability transfers to a bridge institution subject to appropriate safeguards, such as time restrictions (KA3.4(iii)). - Power to arrange the sale or wind-down of the bridge institution, or the sale of some or all of its assets and liabilities to a purchasing institution, to best effect the resolution objectives (KA3.4(iv)). ### Bail-in powers (KA3.5–KA3.6) - Powers to carry out bail-in within resolution should enable authorities to: - write down in a manner that respects the hierarchy of claims in liquidation equity or other instruments of ownership of the firm, unsecured and uninsured creditor claims to the extent necessary to absorb the losses (KA3.5(i)); - convert into equity or other instruments of ownership of the firm under resolution (or any successor in resolution or the parent company within the same jurisdiction), all or parts of unsecured and uninsured creditor claims in a manner that respects the hierarchy of claims in liquidation (KA3.5(ii)); - upon entry into resolution, convert or write-down any contingent convertible or contractual bail-in instruments whose terms had not been triggered prior to entry into resolution and treat the resulting instruments in line with (i) or (ii) (KA3.5(iii)). - The regime should permit bail-in to be applied in conjunction with other resolution powers (for example, removal of problem assets, replacement of senior management and adoption of a new business plan) to ensure viability of the firm or newly established entity following bail-in (KA3.6). ### Insurance-specific resolution powers (KA3.7) - For insurance firms, resolution authorities should also have powers to: - undertake a portfolio transfer moving all or part of the insurance business to another insurer without the consent of each and every policy holder (KA3.7(i)); and - discontinue the writing of new business by an insurance firm in resolution while continuing to administer existing contractual policy obligations for in-force business (run-off) (KA3.7(ii)). ### Legal and operational capacity (KA3.8–KA3.9) - Resolution authorities should have the legal and operational capacity to: - apply one or a combination of resolution powers, with resolution actions being either combined or applied sequentially (KA3.8(i)); - apply different types of resolution powers to different parts of the firm’s business (for example, retail and commercial banking, trading operations, insurance) (KA3.8(ii)); - initiate a wind-down for operations judged by the authorities to be not critical to the financial system or the economy (KA3.8(iii)). - In applying resolution powers to individual components of a financial group located in its jurisdiction, the resolution authority should take into account the impact on the group as a whole and on financial stability in other affected jurisdictions, and undertake best efforts to avoid taking actions that could reasonably be expected to trigger instability elsewhere in the group or in the financial system (KA3.9). ### Essential criterion EC 3.1 — Legal criteria and timely entry into resolution - The legal framework includes clear criteria that provide for timely and early entry into resolution before a firm is balance sheet insolvent, when a firm is no longer viable or when it is likely to be no longer viable and, in either case, has no reasonable prospect of return to viability. Adequate arrangements are in place to support the timely determination of non-viability or likely non-viability (EC 3.1). Description and findings re EC3.1 (DFA and Banking) - DFA (Title II) appointment process for FDIC as receiver: - A recommendation must be made by the FRB and the FDIC to place a financial company other than a broker-dealer or insurance company into receivership. - Upon a vote by two thirds of the directors of both the FRB and the FDIC a written recommendation is delivered to the Treasury Secretary, which must include: - evaluation of whether the financial company is in default or in danger of default; - description of the effect that the default of the financial company would have on financial stability in the U.S.; - evaluation of why a case under the Bankruptcy Code is not appropriate for the financial company. - The Treasury Secretary, in consultation with the U.S. President, must determine whether the financial company should be placed into receivership, based (amongst other factors) on whether: - the financial company is in default or in danger of default; - the failure of the financial company and its resolution under otherwise applicable federal or state law would have serious adverse effects on financial stability in the U.S.; - no viable private sector alternative is available to prevent the default; - any effect on creditors, counterparties, and shareholders of the financial company and other market participants as a result of actions under Title II is appropriate, given the impact that such actions would have on financial stability in the U.S.; - any exercise of the OLA would avoid or mitigate such adverse effects, taking into account the effectiveness the OLA powers in mitigating (i) potential adverse effects on the financial system, (ii) the cost to the Treasury, and (iii) the potential to increase excessive risk taking on the part of creditors, counterparties, and shareholders in the financial company; and - a Federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are subject to the regulatory order. - Following the Treasury Secretary’s determination to appoint the FDIC as receiver, the Treasury Secretary must notify the financial company. If the financial company’s board of directors consents to the FDIC’s appointment as receiver, the Treasury Secretary immediately appoints the FDIC. In the absence of acquiescence or consent by the board of directors, the U.S. district court for the District of Columbia has a statutorily circumscribed and expedited role in reviewing the appointment of the FDIC as receiver (see EC 5.5). - Section 203(c)(4) of the Dodd-Frank Act, 12 USC § 5383(c)(4), defines “in default or in danger of default” for Title II as when any of the following apply: - (A) a case has been, or likely will promptly be, commenced with respect to the financial company under the Bankruptcy Code; - (B) the financial company has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; - (C) the assets of the financial company are, or are likely to be, less than its obligations to creditors and others; - (D) the financial company is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business. - The authorities are developing inter-agency procedures to support a timely determination under the “three keys” process and agree the analysis and data requirements (Description). - Insurance companies: while a holding company of an insurance group would be subject to the Title II regime described above, the resolution regime for an insurance company itself under Title II differs in that: - (i) the recommendation to treat an insurance company as a “covered financial company” would be made by the Director of the Federal Insurance Office (as opposed to the FDIC) and the Board of Governors (made by a vote of no fewer than 2/3 of the Board of Governors), at the request of the Secretary or on their own initiative; and - (ii) an insurance company that is a “covered financial company” will be subjected to rehabilitation or liquidation under applicable state law. - It is not clear whether state resolution proceedings could be commenced immediately after the determination or only when the company has also crossed the relevant threshold under state law for the commencement of receivership proceedings (though the “hazardous financial condition” criteria allows state insurance resolution authorities to commence proceedings at a relatively early stage). - Banking (IDI) receivership triggers: - An IDI may be placed into receivership when a wide range of trigger events are met, including: - assets are less than the institution’s obligations; - substantial dissipation of assets due to any violation of any statute or regulation, or any unsafe or unsound practice; - an unsafe or unsound condition to transact business; - any wilful violation of a cease-and-desist order; - any concealment of the institution’s books, papers, records, or assets; - the institution is likely to be unable to pay its obligations or meet its depositors’ demands in the normal course of business; - the institution has incurred or is likely to incur losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the institution to become adequately capitalized without Federal assistance; - any violation of any law or regulation, or any unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution’s condition or otherwise seriously prejudice the interests of the institution’s depositors or the deposit insurance fund; - the institution, by resolution of its board of directors or its shareholders or members, consents to the appointment; - the institution ceases to be an insured institution; - the institution is undercapitalized under the PCA scheme of 12 USC. § 1831o (defined as failing to meet any required minimum level of capital) and (i) has no reasonable prospect of becoming adequately capitalized; (ii) fails to become adequately capitalized when required to do so under section 1831o; (iii) fails to submit a capital restoration plan acceptable to its Federal supervisor within the time prescribed under... *Source: _cr15171 - 3. Resolution Powers* ### section 1831o; or (iv) materially fails to implement a capital restoration plan submitted ### _cr15171 - section 1831o; or (iv) materially fails to implement a capital restoration plan submitted ### Prompt corrective action (PCA) and early intervention - Under the PCA regime a critically undercapitalized bank (defined as tangible equity less than 2 percent of total assets) must be placed in conservatorship or receivership within 90 days of such a determination, unless the FDIC and appropriate regulators determine that other action would protect the DIF. - FDIC and the IDI’s primary federal supervisor may prepare to place the IDI into receivership or seek a healthy purchaser earlier than formal PCA thresholds (e.g., if capital depletes slowly). - FDIC has a rarely used authority to appoint itself as receiver after consultation with, but without requiring the consent of, the chartering authority of the IDI. - The FDIC has statutory special examination authority to ensure timely access to firm-specific information for prompt action in distress. ### State insurance early resolution triggers and standards - State insurance resolution law (e.g., section 207 of IRMA) permits receivership where the insurer is impaired, insolvent, about to become insolvent, or in such condition that continued business would be hazardous. - NAIC Model Regulations (MDL#385) set standards that may be used to deem a company in hazardous financial condition; standards include: - Adverse findings reported in financial condition and market conduct examination reports, audit reports and actuarial opinions, reports or summaries; - Whether the insurer has made adequate provision for the anticipated cash flows; - Whether the insurer’s operating loss in the last twelve-month period or any shorter period of time is greater than 50 percent of the insurer’s remaining surplus as regards policyholders in excess of the minimum required; - Whether the insurer’s operating loss in the last twelve-month period or any shorter period of time, excluding net capital gains, is greater than 20 percent of the insurer’s remaining surplus as regards policyholders in excess of the minimum required; - When authorized by risk based capital regulations. ### OLA triggers and recommendations - OLA powers can be triggered when a firm is or is “likely to” be balance sheet or cash flow insolvent or has depleted “substantially all of its capital.” - Recommendation: authorities should issue guidance to elaborate circumstances and “suitable indicators of non-viability” (EN 3.1(c)) with illustrative scenarios, clarifying interpretation of “likely to” and “substantially all,” to enable commencement of OLA prior to insolvency. - Noted lack of clarity on how DFA triggers will mesh with state resolution law for insurance. ### EC3.2 — Removal/replacement of senior management and recovery of compensation - DFA: FDIC as receiver succeeds to all rights, titles, powers, and privileges of the failed firm and of any stockholder, member, officer or director; FDIC can remove and replace senior management and directors; statutory obligation introduced to dismiss managers and directors responsible for the condition of the failed financial company. - FDIC can pursue monetary damages via civil judicial action from directors or officers of a covered financial company whose actions are deemed grossly negligent (DFA Section 210(f) and 12 CFR 380.7). - FDIC can file action to recoup past “compensation” from current or former senior executives and directors “substantially responsible” for the condition of the failed financial company for a period of two years preceding failure, and in cases of fraud for an unlimited period (DFA Section 210(s)). - Standard is negligence test: failure to exercise the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances. - Compensation includes variable remuneration such as bonuses and incentives. - Banking (FDI Act): FDIC as receiver can remove and replace senior management and pursue claims and recover monies via civil action for gross negligence or other state-law standards; FDI Act does not provide powers to recover compensation from senior executives as in the DFA. - State insurance: commissioner/rehabilitator generally has power to remove and replace senior management and to pursue legal remedies, including monetary damages for criminal or tortious conduct or breach of contractual or fiduciary obligations. - Finding / Recommendation: authorities have powers under DFA and FDI Act to remove and replace management and to pursue monetary damages, but it is recommended to amend the FDI Act to provide similar powers to recover compensation, including variable remuneration, from those “substantially responsible” for the failure. ### EC3.3 — Temporary control and operation of firms in resolution - DFA: FDIC as receiver has broad authority to manage assets and operations to restructure or wind down, repudiate, enforce or assign contracts, enter into contracts and purchase and sell assets. - Banking: FDIC conservator powers used to preserve going-concern value and return IDI to health; conservator protection against termination rights is 45 days compared to 90 in receivership. - State insurance: commissioners may obtain a “seizure order” (ex parte) and, upon receivership, have broad powers to control operations, but many restructuring measures require court approval and rehabilitation plans submitted to court. ### EC3.4 — Continuity of services and requiring intra-group service provision - DFA and Banking: FDIC can continue to provide services to successor/acquiring entities and use private persons to assist in management/disposition of assets; lacks explicit statutory power to require companies in the same group not controlled by the firm in resolution to continue providing essential services. - State insurance: commissioner may continue purchasing services and such vendor fees are administrative expenses given high priority, but state law does not specifically provide power to force companies within or outside the group to continue rendering services; section 108 C. of IRMA prohibits termination of contracts solely because receivership commenced (only six states have adopted IRMA). - Finding / Recommendation: Both DFA and FDI Act lack explicit powers to require same-group companies (regulated or not) to continue providing services, including from firms subject to bankruptcy or resolution; recommended adoption of such powers for banking and a similar approach for insurance. ### EC3.5 — Sale, merger, or transfer without consent - DFA and Banking: FDIC as receiver can merge the failed institution, transfer or sell any asset or liability to a third party (including bridge or asset management vehicle) without prior notification or consent of shareholders, depositors, policyholders or creditors. Ex post notification required by 5 p.m. (eastern time) on the business day following appointment of the Corporation as receiver if financial contracts are transferred. - State insurance: rehabilitator generally may effect sale, merger or transfer of insurance portfolios without consent, but typically via a rehabilitation plan filed with the court and only approved after notice and hearing. - Finding: DFA and FDI Act consistent with EC3.5; state receivership laws allow similar powers but require prior notice and court approval. ### EC3.6 — Reverse transfers from bridge institutions - DFA and Banking: Transfers to bridge institutions are effected by contractual purchase and assumption agreements; Explanatory Note (EN) 3(w) allows return of assets/liabilities from bridge institution subject to contractual conditions and specified price and payment period. Sample P&A agreements specify assets/liabilities that must be returned at FDIC request. - State insurance: use of bridge institutions or asset management vehicles is not typical and not explicitly envisaged; a rehabilitator could enter contracts providing for retransfer, but exercise would require court approval. - Finding: DFA and FDI Act comply with EC3.5; state rehabilitators face court-approval constraints for reverse transfers. ### EC3.7 — Establishing bridge institutions (KA 3.4) - DFA and Banking: - FDIC has powers to establish one or more bridge institutions and transfer assets and liabilities selected by FDIC (FDI Act, 12 USC. § 1821(n)(1)(A); DFA Section 210(a)(1)(F) and (h)). - FDIC discretion to specify bridge institution terms, including ownership structure; bridge institution status terminates upon sale of 80 percent or more of its capital stock to a person/entity other than FDIC or another bridge institution. - Both set maximum five years on life of a bridge. - FDIC can issue and offer capital stock or other securities and make funds available in lieu of capital; bridge depository institution not deemed undercapitalized for discount window access. - DFA allows authorization for bridge to obtain credit; OLF can serve as back-up source of liquidity support; FDIC could facilitate private-sector funding by providing guarantees backed by OLF authority. - DFA does not allow FDIC to transfer more liabilities than assets to bridge institution and cover the shortfall, which could constrain if TLAC inadequate or issued in wrong place in group. - Bridge institution regulatory form: insured national bank or federal savings association chartered by OCC; DFA may grant federal charter and approve articles of association. - Bridge institution governance: board of directors appointed by FDIC. - State insurance: - Establishing a legal bridge entity to take over selected portfolios has not been generally used or explicitly addressed in state law; typical approach is transfer/reinsurance to guaranty association or run-off. - Any establishment/operation of bridge institution would be subject to court approval. - Finding: FDIC has statutory bridge powers consistent with EC3.7; state insurance laws do not explicitly provide such powers and practice is limited; court approval required in insurance context. ### EC3.8 — Asset management vehicles - DFA and Banking: FDIC as receiver’s powers to succeed to rights and operate the failed entity enable establishment of separate asset management vehicles; FDIC has used securitization vehicles and joint venture equity partnerships to manage non-performing or difficult-to-value assets. - State insurance: establishment of asset management vehicles possible with court approval but not common; most insurer assets transferred to healthy acquirer; use in receivership unclear and would be subject to court approval. - Finding: FDIC has powers under FDI Act and DFA to establish asset management vehicles; state insurance frameworks do not explicitly provide for such vehicles. ### EC3.10 — Absorbing losses: write-downs, creditor claims, and exchanges - DFA: - DFA does not include explicit statutory bail-in powers. - FDIC as receiver can determine claims per statutory hierarchy (DFA Section 210(b)), terminate claims of equity holders and creditors, and pay lesser value consistent with statutory hierarchy. - FDIC can effectively exchange equity in a successor (including a bridge financial company) to satisfy claims by causing bridge to issue capital stock or securities and convert liabilities into equity claims. - FDIC is developing a single point of entry (SPE) strategy for SIFIs under Title II: FDIC appointed as receiver to ultimate U.S. parent holding company, immediately charter a bridge financial company to which substantially all assets of U.S. parent (including investments/loans to subsidiaries) would be transferred; rights related to equity, subordinated debt and senior unsecured debt of U.S. parent in resolution would be terminated, with payment/satisfaction determined pursuant to claims process. - SPE envisages securities-for-claims exchange six to nine months after establishing bridge; equity and new debt of successor(s) issued to creditors in satisfaction and bridge terminated. - Banking (FDI Act): - FDI Act does not include explicit statutory bail-in powers; equivalent powers could achieve same economic effect in principle but no planning undertaken and not used in practice. - State insurance: - State receivership law generally authorizes receiver to cancel or write off equity and to terminate or write down unsecured and uninsured creditor claims. - It would not appear to explicitly authorize exchange of claims into equity in the firm; unclear whether debt-for-equity exchanges like those in bank bridge operations are possible. - Any restructuring operations would require court approval after notice and hearing. *UNITED STATES INTERNATIONAL MONETARY FUND* ### Section 402 of IRMA explicitly empowers a rehabilitator to cancel various obligations of the ### _cr15171 - Section 402 of IRMA explicitly empowers a rehabilitator to cancel various obligations of the ### Cancellation, write-down and equity-substitution powers (insurance and banking) - Section 402 of IRMA explicitly empowers a rehabilitator to cancel various obligations of the insurer with court approval (subject to a no creditor worse off principle). - IRMA (Section 503 (B)) provides that a liquidator may, with court approval, sell the insurer so that all outstanding stock of the corporate entity is cancelled and new stock or other securities are authorized and issued to an acquirer (with the acquirer’s consent) to effect a change in control of the corporate entity. - While these provisions suggest a liquidator could, with court approval, cancel or write off equity and terminate or write down certain unsecured or insured claims, it is unclear whether such claims could be exchanged on a mandatory basis with equity in the existing or a successor bridge firm. - Such operations are currently unknown in State insurance receivership law and it is unclear to what degree they would be possible in most states; any such operation would be subject to court approval. - Further work on the feasibility of bail-in in the context of an insurance company is warranted. ### Findings and recommended clarifications (DFA, FDI Act, FDIC powers) - The DFA and the FDI Act include powers which could enable the FDIC to carry out the actions set out in EC 3.10, including: - Bail-in effected by terminating corporate rights of shareholders and creditors upon entry into resolution. - A claims payment process whereby shareholders and creditors bear losses and receive payment for remaining value in the form of equity and debt securities of a newly established company. - Recommended clarifications (via final notice or regulation) on key aspects: - The valuation process and the possible counterfactual of a liquidation under general insolvency laws. - The communication strategy to creditors. - The legal mechanics for the establishment of the new holding company. - The treatment of creditors who would not meet the suitability requirements for shareholders. - Corporate governance rules applicable to the bridge bank or bridge financial company. - The disclosure and registration requirements and related waivers applying in a Title II proceeding. - It is not clear to what degree the powers and authority of a state commissioner, in either rehabilitation or liquidation, would permit all of the operations provided for under EC 3.10 under most state insurance resolution regimes; implementation would require court approval. ### EC3.11 — scope of bail-in power and hierarchy of claims - DFA: Section 206(3) requires the FDIC in all OLA actions to ensure that unsecured creditors bear losses in accordance with the hierarchy of claims in Section (see EC 5.1). - Title II protects fully secured creditors, only allowing for any under-collateralized portion of a secured claim to be treated in accordance with the hierarchy above. - The DFA gives the FDIC discretion to treat pari passu creditors differently under a limited set of circumstances (see EC 5.2); the FDIC has stated it would not exercise this discretion to result in preferential treatment to holders of long-term senior debt (defined as unsecured debt with a term of longer than one year), subordinated debt, or equity. - Authorities explained that in most cases, general creditor claims such as long-term unsecured debt would be potentially subject to conversion to equity in a bridge financial company or successor entity; such debt would not be limited to pre-defined instruments such as contingent capital. - More clarity is needed on likely treatment of different types of creditors of the same class (e.g., operational liabilities versus long-term bonds); expected to come from refinement of resolution plans and finalizing and implementing the TLAC rule. - State insurance: State resolution regimes set out a hierarchy of claims that must be respected in liquidation and rehabilitation; any cancellation or write down must respect that hierarchy. It is unclear to what degree EC 3.11 operations would be possible under most state insurance regimes. - Findings: DFA and FDI Act meet EC 3.11 requirements, but more clarity on relative treatment of unsecured creditors in the same class would improve predictability. FDIC should issue more guidance and information once TLAC proposals are finalized. ### EC3.12 — powers to cancel, issue, override pre-emption, issue warrants, suspend listings - DFA/Banking: - FDIC as receiver succeeds to all rights, titles, powers, and privileges of the institution and may take over assets and operate the entity with powers of members/shareholders/directors/officers. - This enables FDIC to cancel existing share capital and instruments; issue new shares or other instruments of ownership, including warrants; and override pre-emption rights of existing shareholders. - The framework does not provide powers for the temporary suspension of shares and other relevant securities from listing and trading, but receivership powers are exercised on a closed-firm basis; the institution will be de-listed as a matter of course. - State insurance: - IRMA permits the receivership court, upon the commissioner’s application to sell the corporate entity or charter, to cancel all outstanding stock and other securities of the corporate entity or charter, provided cancellation shall not affect any claim against the estate by holders of equity interests (Section 503 B (2)). - If placed into liquidation, insurer would be de-listed from exchanges on which its shares formerly traded. - Findings: Authorities have the powers set out in EC 3.12 with respect to banking except for explicit temporary suspension of listing (v). U.S. state insurance receivership laws generally provide power to sell or dissolve the corporate entity or charter under court supervision, but it is not clear to what degree these powers could be exercised to effect a bail-in of debt as contemplated in EC 3.10; any such operations would be subject to court approval. ### EC3.13 — contingent convertible instruments (CoCos) in resolution - DFA and Banking: - U.S. legal framework does not differentiate contingent convertible instruments not triggered prior to entry into resolution from other unsecured debt. - Such instruments may be terminated and allocated losses through the claims process in accordance with contractual terms immediately on entry into resolution. - Economic effect: treat instruments or claims pari passu with claims of creditors of the same class, subject to exceptions allowing FDIC to depart from equal treatment (see EC 5.2). FDIC has stated it would not exercise discretion to preferentially treat holders of long-term senior debt, subordinated debt (including contingent convertible), or equity. - State insurance: - Commissioner may, upon court approval, value claims and assign losses by terminating corporate rights, writing down unsecured creditor claims consistent with creditor hierarchy and pari passu with instruments of the same type. - Neither IRMA nor state insurance resolution laws reference unsecured debts with contingent features; issuance of contingent convertible instruments by an insurance company would appear to be rare, making EC 3.13 operations difficult to envisage in state insurance receivership. - Findings: Contingent convertible instruments not triggered prior to entry into resolution can be terminated, written down or converted under the DFA and DFIA. Such instruments, if issued by an insurance company, could be terminated or written down in receivership with court approval. ### EC3.15 — restructure, limit or write down insurance and reinsurance liabilities - State insurance regimes generally authorize the receiver, subject to conditions, to restructure, limit or write-down liabilities (including insurance and reinsurance liabilities) and allocate losses consistent with the statutory creditor hierarchy. - Policyholders (categorized as superior creditors (class 3)) generally receive payment of claims from estate assets in the normal course; life and annuity business is normally sold to a healthy insurer with guaranty fund support in liquidation. - Property and casualty insurance may be cancelled after lapse of a statutory period (Section 502B of IRMA) and liabilities will be limited or written down consistent with creditor hierarchy. - If insurer in resolution assumes reinsurance from another insurer, reinsurance liabilities are not reduced as a result of the resolution proceeding (Section 611A of IRMA). ### EC3.16 — moratorium / stay powers - DFA and Banking: - Both legislations impose a statutory stay on the exercise of creditor actions to attach assets or otherwise collect money or property from the firm. - For contracts other than financial contracts (see KA 4), there is generally a 90-day stay in which parties cannot terminate the contract or obtain control of the institution’s property. - For financial contracts cleared by or subject to rules of a clearing organization, if the FDIC as receiver fails to satisfy margin, collateral or settlement obligations, the clearing organization has right to exercise default remedies. - No property of the FDIC shall be subject to levy, attachment, garnishment, foreclosure, or sale without FDIC consent, nor shall any involuntary lien attach to FDIC property. - State insurance: - Commencement of a receivership proceeding generally operates as a stay applicable to all persons on commencement or continuation of judicial, administrative or other action or proceeding against the insurer, including arbitration, that was or could have been commenced before delinquency proceeding; or to recover a claim that arose before commencement (IRMA Section 108). - Example: N.J.S.A 17B--53 provides that upon appointment of a liquidator no action at law or equity or arbitration shall be brought against the insurer or liquidator, nor shall existing actions be maintained after issuance of that order. - Findings: The resolution authority has the power to impose a moratorium (stay of creditor actions to attach assets or otherwise collect money or property from the firm and suspension of payments). ### EC3.17 — temporary restriction or suspension of policyholder rights - State insurance: Commissioner as resolution authority has the power, with court approval, to temporarily restrict or suspend policyholder withdrawal rights. - Example: Under New York Insurance Law, superintendent as receiver may, under court order, suspend claim payments and halt transfer of cash or loan values on life insurance contracts. - Findings: Under U.S. state insurance resolution law, the receiver, with court approval, has the power to temporarily restrict or suspend the rights of policyholders to withdraw from their insurance contracts. ### EC3.18 — closure, wind-down, timely pay-out and transfers - DFA and Banking: - FDIC as resolution authority has broad powers to effect closure and orderly wind-down and liquidation of whole or part of a failing institution and has a long track record of liquidating IDIs. - For insured deposits, FDIC can pay claims from the Deposit Insurance Fund or make available transferred deposits in a new IDI. - Non-deposit client assets held in trust or similar fiduciary capacity are treated separately and returned to clients or transferred to bridge bank or new IDI. - State insurance: - Commissioner vested with broad powers to effect closure, wind-down and liquidation of whole or part of insurer, subject to court approval. - Upon liquidation order rights and liabilities of insurer and creditors, policyholders, shareholders and all others become fixed as of date of entry of order; rights of creditors paid in accordance with hierarchy. - Example: New York Insurance Law Section 7405 fixes rights and liabilities upon liquidation order; superintendent may transfer insurance contracts to a third party or engage in commutation to accomplish timely return of part of contract value. - Findings: Resolution authority can effect closure and orderly wind-down and liquidation including timely pay-out or transfer of insured deposits, prompt transfer or return of client assets and transfer of insurance contracts; in state insurance resolution, exercise is subject to court approval, notice to affected parties and a hearing. ### EC3.19 — run-off and discontinuation of new business - State insurance: - Run-off is possible through administrative supervision (solvent run-off) or rehabilitation/liquidation proceeding (insolvent run-off). - Property & casualty insurers: new policies may be discontinued and claims handled in run-off through administrative supervision or rehabilitation; in liquidation, existing policies must be cancelled and claims on cancelled policies transferred to guarantee association or classified as receivership claims. - Life & health insurers: new policies may be discontinued and claims handled in run-off in rehabilitation; guaranty associations required to take measures to assure payment of policyholder obligations in liquidation and commonly facilitate transfer of policies to a financially stable insurer or provide financial support for run-off, receiving distributions to the extent possible in repayment. ### EC3.20 — combining and sequencing resolution actions - DFA and Banking: FDIC has broad authority to combine resolution actions and discretion to apply such actions in the order it determines to be most appropriate. - State insurance: Receiver has broad authority to choose appropriate combination of available powers for a rehabilitation or liquidation plan to submit to a court; use is subject to receivership court approval after notice and hearing. - Findings: Legal framework does not restrict the resolution authority from exercising powers separately or in any combination nor require actions in a particular order. ### Assessment of KA3 — comments and key issues - Resolution regime under DFA and for banks under FDI Act is closely aligned with KA3. - Areas needing clarity and recommendation: - Triggers under the DFA should be clarified to ensure they apply suitably early at a point of non-viability. - Authorities should adopt powers in both DFA and FDI Act to allow FDIC to require companies in the same group (regulated or not) to continue to provide services, including those not governed by contract, as necessary to support effective resolution. - It is recommended (though not required in the AM) that FDIC issue a final notice or regulation clarifying SPE approach aspects: valuation process, communication strategy, legal mechanics for establishing a new holding company, treatment of creditors who do not meet suitability for shareholders, disclosure and registration requirements and related waivers in Title II. - State receivership observations: - Some powers are readily available under state law (e.g., taking control, stays and moratoria), while most restructuring powers are only available via court-approved rehabilitation or liquidation plan with notice and potentially a hearing. - Two fundamental issues from the court role: - For powers unknown in state insurance receivership (e.g., bail-in), absence of precedent prevents concluding these powers would be readily available. - Time required to obtain court approval may not be fully consistent with timeliness envisaged in the Key Attributes; U.S. courts are efficient and defer to commissioners, but potential delays could impede rapid intervention. - The Key Attributes acknowledge court orders/confirmations may be required but stress ensuring court approval requirements do not impede rapid intervention; EN 5 (e) suggests expedited procedures and applications without notice to the firm or other affected parties as facilitators. - Generally, it would not appear a U.S. insurance resolution authority could obtain court approval for the full range of resolution powers with the speed contemplated by the standard. The KA do not differentiate timelines for banks and insurers beyond allowing longer timelines for traditional insurance techniques. *Source: _cr15171 - Section 402 of IRMA explicitly empowers a rehabilitator to cancel various obligations of the* ### 4. Set-off, Netting, Collateralisation, Segregation of Client Assets ### 4. Set-off, Netting, Collateralisation, Segregation of Client Assets ### Key Attribute requirements (KA4) - KA4.1: The legal framework governing set-off rights, contractual netting and collateralisation agreements and the segregation of client assets should be clear, transparent and enforceable during a crisis or resolution of firms, and should not hamper the effective implementation of resolution measures. - KA4.2: Subject to adequate safeguards, entry into resolution and the exercise of any resolution powers should not trigger statutory or contractual set-off rights, or constitute an event that entitles any counterparty of the firm in resolution to exercise contractual acceleration or early termination rights provided the substantive obligations under the contract continue to be performed. - KA4.3: If contractual acceleration or early termination rights nevertheless are exercisable, the resolution authority should have the power to stay temporarily such rights where they arise by reason only of entry into resolution or in connection with the exercise of any resolution powers. The stay should: - (i) be strictly limited in time (for example, for a period not exceeding 2 business days); - (ii) be subject to adequate safeguards that protect the integrity of financial contracts and provide certainty to counterparties (see Annex IV on Conditions for a temporary stay); - (iii) not affect the exercise of early termination rights of a counterparty against the firm being resolved in the case of any event of default not related to entry into resolution or the exercise of the relevant resolution power occurring before, during or after the period of the stay (for example, failure to make a payment, deliver or return collateral on a due date). - KA4.4: Resolution authorities should apply the temporary stay on early termination rights in accordance with the guidance set out in Annex IV to ensure that it does not compromise the safe and orderly operations of regulated exchanges and FMIs. ### Temporary stay mechanics and limits - The stay may be discretionary (imposed by the resolution authority) or automatic; jurisdictions should ensure clarity as to the beginning and the end of the stay. - Example timing for stays in U.S. regime: - QFCs (under DFA): counterparties cannot exercise rights to terminate, liquidate or net solely by reason of appointment of FDIC as receiver until 5:00 p.m. (Eastern Time) on the business day following the date of appointment, or after notice that the contract has been transferred. - Other contracts (under FDI Act for IDIs): counterparties are prohibited from exercising termination, acceleration or default rights without FDIC consent during the 90-day period commencing on the date of appointment of the FDIC as receiver. - Conditions where termination can be exercised after stay: - If contracts are transferred to another entity or remain with a recapitalised firm, early termination rights can be exercised after the expiry of the stay only for a separate default not based on entry into resolution or exercise of resolution powers. - If contracts remain with a failing firm that has not been recapitalised, early termination rights subject to the stay may be exercised immediately on expiry of the stay or upon earlier notification by the resolution authority that the contracts will remain with that failing firm. - Clearing organizations: if the FDIC as receiver fails to satisfy margin, collateral or settlement obligations as required by the rules of the clearing organization when due, the clearing organization has the immediate right to exercise rights and remedies under its rules (including liquidation of positions and collateral), without prejudice to the temporary stay. ### Essential Criterion EC4.1 — Client asset identification and safeguards - Requirement: Firms must maintain effective arrangements for identification and safeguarding of client assets enabling rapid identification and legal clarity about claims and entitlements and clear rules for loss sharing among clients in event of shortfalls. - Findings and legal framework examples: - DFA: statutes require separate accounting and segregation of client assets for certain regulated entities (e.g., futures commission merchants, collective investment schemes). - Banking: OCC-authorized banks holding assets in a fiduciary capacity shall segregate such assets; owners of funds held in trust have a lien on bonds or other securities so set apart (12 U.S.C. § 92ª). - Futures commission merchants: client assets deposited with a bank must be held under an account identifying funds as belonging to clients and held in segregation pursuant to Commodity Exchange Act; IDI must acknowledge funds are client assets and may not offset obligations by funds in segregated account. - Brokers and dealers: must maintain a special reserve account separate from other bank accounts (17 C.F.R. 240.15c3-3(e)) and obtain a “no-lien letter” from the bank (17 C.F.R. 240.15c3-3(f)). - FDI Act: FDIC as receiver determines allowance/disallowance of claims; may disallow portion of a claim not proved to its satisfaction (12 U.S.C. § 1821(d)(5) and (6)). - Loss-sharing: in liquidation of a futures commission merchant, trustee shall distribute “customer property” in priority; any shortfall is mutualized pro rata on basis of allowed net equity claims (see Section 761(10) and 766(h) of the Bankruptcy Code and 17 CRF §190.08). - Finding: The U.S. legal framework requires firms to maintain effective arrangements for identification and safeguarding of client assets. ### Essential Criterion EC4.2 — Prohibition on set-off/termination triggered solely by resolution - Requirement: Legal framework should not establish set-off or early termination rights that arise solely by virtue of entry into resolution or exercise of resolution powers; such rights should be prohibited except as provided in EC4.3. - DFA/Title II: - Counterparties to QFCs with a covered financial company may not exercise rights to terminate, liquidate or net solely by reason of appointment of the FDIC as receiver (DFA Section 210(c)(10)). - For other contracts, counterparties with a covered financial company are prohibited from exercising termination, acceleration, default rights or obtaining possession or control of property without FDIC consent for 90 days from appointment of FDIC as receiver (DFA Section 210(c)(13)(C)(i)); contracts are enforceable by FDIC notwithstanding contractual provisions providing for termination upon insolvency or receivership (DFA Section 210(c)(13)(A)). - FDI Act (IDIs): - Analogous provisions: (i) non-enforceability of QFCs for a limited period (12 U.S.C. § 1821(e)(10)(B)); (ii) prohibition for non-QFC counterparties to exercise termination/default/acceleration or obtain possession/control without FDIC consent for 90 days (12 U.S.C. § 1821(e)(13)(C)); (iii) FDIC power to enforce contracts notwithstanding contractual termination/default/acceleration provisions (12 U.S.C. § 1821(e)(13)(A)). - State insurance: - Some state receivership laws operate as a stay on termination of contracts if sole basis is entry into receivership (e.g., IRMA Section 108 C(8)). - However, many states (currently 21) have incorporated a “safe harbor” into receivership legislation (Section 711 of IRMA and NAIC model provisions) to exclude QFCs from any stay, permitting early termination and netting of QFCs solely as a result of commencement of receivership or exercise of resolution powers. - Findings: U.S. regime under DFA and the FDI Act precludes exercise by counterparties of early termination rights that arise solely due to entry into resolution or exercise of resolution powers. QFC counterparties cannot exercise set-off rights when based solely on those grounds and within a limited period. For contracts other than financial contracts, counterparties may exercise early termination rights 90 days after FDIC appointment as receiver. State insurance regimes vary; QFC safe harbor in many states permits early termination. ### Essential Criterion EC4.3 — Temporary stay where prohibition does not apply - Requirement: Where contracts are not subject to the prohibition in EC4.2, the legal framework should provide for a temporary stay on early termination rights arising solely by reason of entry into resolution or exercise of resolution powers, subject to KA4.3 conditions. - DFA/Title II: - Early termination rights against a covered financial company arising only by reason of entry into resolution or exercise of resolution powers are subject to a temporary stay (DFA Section 210(c)(10)(B) and 13(C)). - For QFCs: counterparties cannot exercise termination/liquidation/netting rights solely by reason of appointment of FDIC as receiver until 5:00 p.m. (Eastern Time) on the business day following appointment or after notice that the contract has been transferred. - If FDIC as receiver fails to satisfy margin/collateral/settlement obligations under clearing organization rules when due, the clearing organization has immediate right to exercise its rules-based remedies (DFA Section 210(c)(8)(G)), without prejudice to the temporary stay. - FDIC as receiver has power to enforce contracts of subsidiaries or affiliates of the covered financial company notwithstanding termination/liquidation/acceleration rights based on insolvency or receivership if guaranty/support and related assets/liabilities are transferred to and assumed by a bridge financial company or third party within same transfer period, or FDIC provides adequate protection and notice within same time limit (DFA Section 210(c)(16); see also 12 C.F.R. § 380.12). - FDI Act (Banking): - Contains analogous temporary stay provisions, but lacks the specific power in DFA to enforce contracts of subsidiaries or affiliates described above. - State insurance: - State receivership laws do not generally provide the EC4.3 framework to impose a temporary stay to facilitate transfer of contracts; 21 states have adopted QFC “safe harbor” provisions excluding QFCs from any stay. - NAIC guideline (“Guideline for Stay on Termination of Netting Agreements and Qualified Financial Contracts”) would limit counterparties’ rights until 5:00 p.m. (eastern time) on the business day following appointment of receiver or after notice of transfer, but has been enacted into law to a very limited extent. - Findings: QFCs and other contracts are subject to a temporary stay under DFA and the FDI Act; the FDI Act lacks DFA’s mechanism to enforce subsidiaries’/affiliates’ contracts notwithstanding early termination rights. State insurance regimes generally do not provide a comprehensive temporary stay system; many states’ “safe harbor” excludes QFCs from stays. ### Essential Criterion EC4.4 — Clarity on which provision applies - Requirement: Any contract with a domestically incorporated financial institution that contains early termination rights must be subject to either the prohibition in EC4.2 or the temporary stay in EC4.3; where both exist, it must be clear in advance which applies. - DFA/FDI Act: - U.S. legal framework includes both the prohibition (EC4.2) and the temporary stay (EC4.3). The prohibition is subject to a defined period: 90 days for contracts other than QFCs; a temporary stay applies for QFCs. - Identification of which regime applies depends on definition of QFC (includes securities contract, commodity contract, forward contract, repurchase agreement, swap agreement, and any similar agreement the FDIC determines to be a QFC) (FDI Act, 12 U.S.C. § 1821(e)(8)(D)(i); DFA Section 210(c)(8)(D)). - State insurance: - Framework varies by state and does not provide a comprehensive system precluding exercise of early termination provisions as envisaged in EC4.2 and EC4.3; in most states with safe harbor provisions, QFCs are expressly excluded from any stay and there is no provision for the temporary stay under EC4.3. - Findings: Title II and the FDI Act provide a clear regime distinguishing prohibition and temporary stay based on QFC definition; state insurance regimes do not generally provide comprehensive preclusion of early termination. ### Overall findings and assessment of KA4 - Strengths: - DFA and the FDI Act provide arrangements that preserve financial stability by disallowing early termination rights solely as a result of entry into resolution and, where such rights are exercisable, by providing a limited stay. - The U.S. framework contains specific timing rules for temporary stays (e.g., 5:00 p.m. (Eastern Time) on the business day following appointment for QFCs; 90-day prohibition for other contracts under FDIC receivership). - Shortcomings / areas for improvement: - The FDI Act could usefully be amended to enable the FDIC to override early termination rights in contracts of subsidiaries and affiliates of an IDI undergoing resolution (the DFA contains such a mechanism; FDI Act does not). - Many state insurance resolution regimes have implemented a “safe harbor” provision that excludes QFCs from stays and do not provide for a temporary stay on early termination of financial contracts consistent with KA4/EC4.3. - Notable numeric and legal references preserved exactly as in source: - Time limit example in KA4.3: "for a period not exceeding 2 business days". - DFA timing for QFC temporary stay: "until 5:00 p.m. (Eastern Time) on the business day following the date of the appointment". - FDIC receivership period for non-QFC contracts: "the 90-day period commencing on the date of appointment of the FDIC as receiver". - Number of states with safe harbor: "21". - Statutory citations: 12 U.S.C. § 92ª; 17 C.F.R. 240.15c3-3(e); 17 C.F.R. 240.15c3-3(f); FDI Act, 12 U.S.C. § 1821(d)(5) and (6); DFA Section 210(c)(10); DFA Section 210(c)(13)(C)(i); DFA Section 210(c)(13)(A); 12 U.S.C. § 1821(e)(10)(B); 12 U.S.C. § 1821(e)(13)(C); 12 U.S.C. § 1821(e)(13)(A); IRMA Section 108 C(8); IRMA Section 108 E (4) and (8); DFA Section 210(c)(16); 12 C.F.R. § 380.12; FDI Act, 12 U.S.C. § 1821(e)(8)(D)(i); DFA Section 210(c)(8)(D). - Final assessment comment: The U.S. legal framework under DFA and the FDI Act provides for adequate arrangements preserving financial stability by disallowing early termination rights solely as a reason of the entry of a firm in resolution, and, where such early termination rights are exercisable, for a limited stay from such rights. That said, the FDI Act could usefully be amended to enable the FDIC to override early termination rights in contracts of subsidiaries and affiliates of an IDI undergoing resolution. While many state insurance resolution regimes have implemented a “safe harbor” provision, they do not provide for a temporary stay on the early termination of financial contracts. *Source: 4. Set-off, Netting, Collateralisation, Segregation of Client Assets — U.S. assessment in the provided IMF content unit.* ### 5. Safeguards ### 5. Safeguards ### Key Assertions - KA5.1 Resolution powers should be exercised in a way that respects the hierarchy of claims while providing flexibility to depart from the general principle of equal (pari passu) treatment of creditors of the same class, with transparency about the reasons for such departures, if necessary to contain the potential systemic impact of a firm’s failure or to maximise the value for the benefit of all creditors as a whole. In particular, equity should absorb losses first, and no loss should be imposed on senior debt holders until subordinated debt (including all regulatory capital instruments) has been written-off entirely (whether or not that loss-absorption through write-down is accompanied by conversion to equity). - KA5.2 Creditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm under the applicable insolvency regime (“no creditor worse off than in liquidation” safeguard). - KA5.3 Directors and officers of the firm under resolution should be protected in law (for example, from law suits by shareholders or creditors) for actions taken when complying with decisions of the resolution authority. - KA5.4 The resolution authority should have the capacity to exercise the resolution powers with the necessary speed and flexibility, subject to constitutionally protected legal remedies and due process. In those jurisdictions where a court order is still required to apply resolution measures, resolution authorities should take this into account in the resolution planning process so as to ensure that the time required for court proceedings will not compromise the effective implementation of resolution measures. - KA5.5 The legislation establishing resolution regimes should not provide for judicial actions that could constrain the implementation of, or result in a reversal of, measures taken by resolution authorities acting within their legal powers and in good faith. Instead, it should provide for redress by awarding compensation, if justified. - KA5.6 Jurisdictions should provide flexibility to allow temporary exemptions from disclosure requirements or a postponement of disclosures required by the firm, for example, under market reporting, takeover provisions and listing rules, where the disclosure by the firm could affect the successful implementation of resolution measures. ### Essential criteria and findings — EC5.1: Respect for hierarchy of creditor claims - EC5.1 The resolution authority is required to exercise resolution powers in a way that respects the hierarchy of creditor claims under the applicable insolvency regime. - Description and findings re EC5.1: - DFA (Title II) hierarchy of unsecured claims when a financial company is resolved under Title II: - (i) administrative expenses of the receiver; - (ii) any amounts owed to the U.S., unless the U.S. agrees or consents otherwise, and provided that unsecured claims of the U.S. shall, at a minimum, have a higher priority than liabilities of the covered financial company that count as regulatory capital; - (iii) certain wages, salaries, or commissions earned by an individual (other than such amounts owed to senior executives or directors of the covered financial company), up to a certain amount and not later than 180 days before the date of the appointment of FDIC as receiver; - (iv) certain contributions to employee benefit plans, within specifically defined limits; - (v) any general or senior liability of the covered financial company; - (vi) any obligation subordinated to general creditors; - (vii) wages, salaries, or commissions owed to senior executives or directors of the covered financial company; and - (viii) any obligation to shareholders, members, general partners, limited partners, or other persons, with interests in the equity of the covered financial company arising as a result of their status as such. - If the FDIC, as receiver for a covered financial company, is unable to obtain unsecured credit or issue unsecured debt for the covered financial company from commercial sources, it may, subject to a court hearing, authorize the obtaining of credit or the issuance of debt by the covered financial company, with priority over any or all obligations of such company. - In taking action under Title II, the FDIC shall ensure that the shareholders of a covered financial company shall not receive payments until after all other claims and the OLF are fully paid. - The FDIC shall ensure that unsecured creditors bear losses, consistent with the above described priority of claims. (See DFA Sections 206(2) and (3), 210(a)(1)(M) and 210(b).) - Banking (FDI Act) hierarchy of claims for IDIs (other than secured claims to the extent of such security): - (i) administrative expenses of the receiver; - (ii) any deposit liability of the IDI; - (iii) any general or senior liability of the IDI; - (iv) any obligation subordinated to depositors or general creditors; and - (v) any obligation to shareholders or members arising as a result of their status as shareholders or members (including any depository institution holding company or creditor of such company). (FDI Act, 12 U.S.C. § 1821(d)(11).) - The FDIC, in its corporate capacity as administrator of the DIF, may pay claims on accounts of insured deposits in cash from the DIF or transfer such insured deposits to a new IDI. The FDIC’s claim as subrogee bears the ranking of a deposit liability under (ii) above. (FDI Act, 12 U.S.C. § 1821(f); § 1821(g)(1).) - State insurance: Section 801 of IRMA proposes two alternatives dividing unsecured claims into thirteen classes, requiring each class be paid in full or adequate funds retained before the next class receives payment. State insurance receivership laws generally require creditors be treated fairly and equitably and that in a restructuring in rehabilitation creditors receive at least as much as in liquidation. - Findings: - When acting as receiver under Title II and for an IDI under the FDI Act, the FDIC is required to exercise resolution powers respecting the respective hierarchies and allocating losses to shareholders and unsecured creditors. - State insurance resolution regimes provide a clear hierarchy of creditor claims considered in both liquidation and rehabilitation. ### Essential criteria and findings — EC5.2: Pari passu and permitted departures - EC5.2 The legal framework requires the resolution authority, as a general principle, to observe the principle of equal (pari passu) treatment of creditors of the same class while permitting departure from that principle where necessary to: (i) protect financial stability by containing the potential systemic impact of the firm’s failure; or (ii) maximise the value of the firm for the benefit of all creditors. - Description and findings re EC5.2: - DFA (Title II) permits the FDIC as receiver to treat similarly situated creditors differently if: - (A) the FDIC determines such action is necessary to: - (i) maximize the value of the assets of the covered financial company; - (ii) initiate and continue operations essential to implementation of the receivership or any bridge financial company; - (iii) maximize the present value return from the sale or other disposition of the assets of the failed covered financial company; or - (iv) minimize the amount of any loss realized upon the sale or other disposition of the assets of the covered financial company; and - (B) all claimants similarly situated receive not less than what they would have received if the FDIC had not been appointed receiver and the covered financial company had been liquidated under chapter 7 of the Bankruptcy Code or any similar provision of state insolvency law. - The above departure does not affect secured claims or secured entitlements. - The FDIC, with Treasury Secretary approval, may make additional payments or credits to any claimant or category of claimants to minimize losses to the FDIC as receiver, provided: - (i) no claimant or category receiving such additional payments would receive more than the face value amount of any proven claim; and - (ii) the FDIC shall not be obligated to make such payments to any other claimant or category. - The FDIC has ruled it would not exercise discretion under the Dodd-Frank Act to make preferential recoveries higher than the amount established under the priority of payment to holders of long-term senior debt, subordinated debt, or equity, except where the FDIC Board affirmatively determines additional payments to holders of long-term senior debt or similar liabilities are necessary to achieve the objectives in (i)–(iv). - (Relevant DFA provisions: Section 210(b)(4); Section 210(b)(5); Section 210(d)(4). See also 12 C.F.R. § 380.27.) - Banking (FDI Act): The FDIC may, in its discretion to minimize losses, use its own resources to make additional payments or credit amounts to any claimant or category of claimants (e.g., to induce an open IDI to accept liability in a purchase and assumption). The FDIC may also provide assistance for winding up an IDI notwithstanding the least cost test if certain financial stability grounds are met. (FDI Act, 12 U.S.C. § 1821(i)(3).) - State insurance: State regimes generally require equal treatment of creditors of the same class. Section 801, alternative 1 of IRMA explicitly prohibits creating subclasses within a class. Courts would not allow deviation from equal treatment within a class to protect financial stability or maximize firm value if it would materially harm policyholders. IRMA Section 403 E allows separate treatment for de minimis claims sub-classes in a rehabilitation plan. - Findings: - Under Title II, the FDIC is generally required to observe pari passu but has wide flexibility to depart in line with EC5.2. - Under the FDI Act, while no explicit provision permits departure from pari passu, the design of the regime allows effective departures by using DIF resources or providing assistance in derogation from the least cost test for financial stability. - State insurance resolution laws generally require adherence to equal treatment within a class and would not permit departures to protect financial stability. ### Essential criteria and findings — EC5.3: No creditor worse off than in liquidation (NCWOL) - EC5.3 The legal framework provides that creditors that receive less as a result of resolution than they would have received in liquidation have a right to compensation. The resolution regime specifies how the right to compensation can be exercised. - Description and findings re EC5.3: - DFA: Creditors are statutorily required to receive not less than what they would have received had the FDIC not been appointed receiver under Title II and the covered financial company had been liquidated under Chapter 7 of the Bankruptcy Code or any similar provision of state insolvency law. The maximum liability of the FDIC shall not exceed such amount. - Banking (FDI Act): Although IDIs are not subject to Bankruptcy Code liquidation, the FDI Act requires taking into account the counterfactual of liquidation in determining the maximum liability of the FDIC as receiver or the IDI. The maximum liability of the FDIC shall equal the amount a claimant would have received if the FDIC had liquidated the assets and liabilities of the failed IDI without exercising resolution powers (e.g., transfer to a bridge bank or to another IDI). Use of the DIF is aimed to facilitate resolution and the application of the least cost test to maximize value for creditors. - State insurance: State insurance receivership laws generally require that creditors be treated fairly and equitably in resolution proceedings and, in the case of a restructuring of liabilities in a rehabilitation proceeding, receive at least as much as they would have received in a liquidation. - Findings: - Title II provides a statutory NCWOL safeguard with the FDIC’s maximum liability limited to the amount creditors would have received in liquidation. - FDI Act resolution practice similarly references the liquidation counterfactual in determining FDIC liability and the use of DIF to support equitable outcomes for creditors. - State insurance frameworks require equitable treatment and, for rehabilitation, at least liquidation-equivalent outcomes for creditors. *Source: _cr15171 - 5. Safeguards* ### Section 403 A of IRMA requires that any rehabilitation plan be fair and equitable to all parties ### _cr15171 - Section 403 A of IRMA requires that any rehabilitation plan be fair and equitable to all parties ### Section 403 A fairness and creditor protection - Section 403 A of IRMA requires that any rehabilitation plan be fair and equitable to all parties concerned, and it provides for no less favorable treatment of a claim or class of claims than would occur in liquidation, unless the holder of a particular claim or interest agrees to such less favorable treatment. - This provision reflects more general principles of state receivership law developed through precedent. - As any resolution plan must be approved by a court, state insurance resolution law does not generally provide for (or require) an express right of compensation in cases where this standard is not met. - Findings: - The “no-creditor worse off safeguard” is incorporated in the U.S. legislation, under both the DFA and the FDI Act. - The right of compensation can be exercised according to general principles, by filing a claim against the FDIC as a receiver or seeking judicial review under the Administrative Procedures Act. - While the no creditor worse off principle also applies in the rehabilitation of an insurer, the court, through its approval of the rehabilitation plan, ensures that creditors receive at least as much as they would have in liquidation. *Findings and legal context on directors and officers protection (EC5.4)* ### EC5.4 — Protection of directors and officers in resolution - Description and findings: - DFA. Upon commencement of an orderly liquidation under Title II, the FDIC takes over the assets of and operates the covered financial company with all the powers of the members or shareholders, the directors, and the officers of the company or IDI, and conducts all business. - The FDIC may also provide for the exercise of any function by any member or stockholder, director, or officer of any covered financial company for which it has been appointed receiver. - Members of the board of directors (or body performing similar functions) of a covered financial company for which the FDIC has been appointed receiver shall not be liable to the shareholders and creditors for acquiescing in or consenting in good faith to the appointment of the FDIC as receiver. - Banking. Same considerations apply with respect to the FDI Act. - State Insurance. Under U.S. state insurance resolution law, the commissioner as receiver effectively takes over control of the insurer in resolution and assumes the role of directors and officers. - Example: Section 17B:32-47a of Life and Health Insurers Rehabilitation and Liquidation Act of New Jersey directs the liquidator to take possession of assets and administer them under court supervision; the liquidator is vested by operation of law with title to property, contracts and rights of action. - Section 402 of IRMA explicitly provides that the authority of directors and officers and managers of the insurer in rehabilitation is suspended upon appointment of rehabilitator; any director, officer or manager not replaced is required to act in compliance with the receiver’s decisions and instructions. - Findings: - The FDIC’s taking over of assets and management should, in principle, shield from liability directors or officers not replaced. - Any director or officer required to act in compliance with the FDIC’s decisions and instructions would not be at risk of liability. - As a state insurance resolution is conducted under court supervision, there is relatively little risk that actions taken in compliance with the court’s decisions will give rise to liability. - While state frameworks do not appear to provide express protection of directors or officers from liability, any potential for such liability would appear to be minimal. ### EC5.5 — Timely exercise of resolution powers and court timelines - Description and findings: - DFA. In the absence of acquiescence or consent by the board, the U.S. District Court for the District of Columbia has a statutorily circumscribed role in the appointment of the FDIC as receiver under Title II. - The court shall decide, on a strictly confidential basis and without prior public disclosure, whether the determination by the Treasury Secretary that the company is a financial company and is in default or in danger of default is arbitrary and capricious. - If the court does not make a determination within 24 hours of receipt of the petition by the Treasury Secretary, liquidation under Title II shall automatically commence. - A claimant may file suit on a claim in the district or territorial court of the U.S. for the district within which the principal place of business of the covered financial company is located within 60 days of the earlier of (i) the expiration of the period in which the FDIC as receiver must provide notification of allowance or disallowance and (ii) notification by the FDIC as receiver of disallowance of the claim, and such court shall have jurisdiction to hear such claim. - Except as otherwise provided under Title II, no court shall have jurisdiction over (i) any claim or action for payment from the assets of any covered financial company for which the FDIC has been appointed receiver, including any assets which the FDIC may acquire from itself as such receiver; or (ii) any claim relating to any act or omission of such covered financial company or the FDIC as receiver. - Courts may not restrain or affect the exercise of powers or functions of the FDIC as receiver, except as provided under Title II, and any remedy against the FDIC shall be limited to money damages. No attachment or execution may be issued upon assets in the possession of the FDIC as receiver. - Once the FDIC is appointed receiver, no prior court approval is required before the FDIC as the resolution authority takes a resolution action or applies a resolution measure. - Banking. Save as provided under the FDI Act, courts may not restrain or affect the exercise of the FDIC’s powers and no attachment or execution may be issued upon assets in the possession of the FDIC as receiver. - The FDI Act provides for a procedure for a determination of claims and for the judicial determination of claims upon the expiration of the period in which the FDIC as receiver must provide notification of allowance or disallowance or upon notification by the FDIC as receiver of disallowance of the claim. - State Insurance. State insurance resolution regime generally requires court approval for significant resolution measures; many restructuring measures (e.g., transfers of assets and liabilities) may only be taken in the context of a rehabilitation or liquidation plan after notice and, if necessary, a hearing. - EN 5(e) guidance: timely exercise of resolution powers could be facilitated by expedited procedures (shortened notice, filing and decision deadlines for appeals) and applications by the resolution authority without notice to the firm or other affected parties. - Findings: - Under Title II, the expedited timeframe (including the 24-hour default rule) allows the exercise of resolution powers with necessary speed and flexibility. - The FDI Act enables the FDIC to exercise its resolution powers in a timely manner. - State insurance requirements for court approval after notice and hearing may, in some cases, undermine timely implementation of necessary resolution measures. - KA and AM acknowledge that a court order or confirmation may be effective, but emphasize that any requirement for court approval should not impede rapid intervention. ### EC5.6 — Remedies available through judicial review - Description and findings: - DFA. The Dodd-Frank Act expressly limits any remedy against the FDIC to money damages; courts may not restrain or affect the exercise of powers or functions of the FDIC as receiver, except as otherwise provided under Title II. - Banking. The FDI Act does not include an explicit DFA-like provision limiting remedies to money damages; however, courts may not restrain or affect the exercise of powers or functions of the FDIC as receiver, except as provided under the FDI Act. - Upon certain circumstances (such as when the FDIC appoints itself as receiver to prevent losses to the DIF), the IDI may, within 30 days of the FDIC’s appointment as receiver for the IDI, bring an action in the U.S. District Court for the District of Columbia or in the district in which the home office of the IDI is located seeking the removal of the FDIC as receiver. - There are no reported precedents of courts removing the FDIC as receiver; consequences of removal—particularly whether acts by the FDIC could be unwound—may not be easily predicted. - State Insurance. State insurance regime generally requires court approval for significant measures; under IRMA, reversal or modification on appeal of an order of resolution proceedings does not affect the validity of the acts of the receivership pursuant to the order. - Findings: - Title II explicitly limits remedies through judicial review to money damages. - No similar explicit limitation exists under the FDI Act, but courts are prevented from restraining or affecting FDIC powers as receiver. - In theory, there exists a remote possibility that the FDIC appointment as receiver could be removed if challenged within 30 days; no precedents exist. - Consideration could be given to adopt a DFA-like provision to limit remedies available from judicial review to money damages. - As most state receivers’ actions are taken with prior court approval, ex post judicial review of administrative actions is limited. ### EC5.7 — Temporary exemptions from disclosure requirements - Description and findings: - DFA and Banking. The U.S. regime generally exercises resolution powers on a “closed-firm” basis: a covered financial company subject to orderly liquidation or an IDI receivership typically will no longer have audited financial statements and may be de-listed from exchanges. - The FDIC, as receiver, succeeds to all rights, titles, powers, and privileges of the covered financial company or IDI; rights and claims of shareholders and creditors against the assets are terminated by statute once the firm enters resolution, except for their right to payment, resolution, or other satisfaction of their claims. - Firms under resolution remain subject to SEC reporting requirements (8-K, 10-K and 10-Q) under the Securities Exchange Act of 1934, but relief may be available in certain circumstances; the SEC has discretion to accept modifications to reporting requirements, similar to modifications accepted from companies undergoing reorganization or bankruptcy. - For the FDI Act context, issuers of financial instruments are generally BHCs; disclosure requirements tend not to apply to IDIs. When a BHC is subject to a bankruptcy proceeding, the SEC may accept modifications to reporting by accepting the monthly reports normally filed with the bankruptcy courts. - The implementation of resolution powers under DFA under the SPE may raise additional complications: valuation of bridge company’s financial situation, reporting, registration and accounting framework, and conversion of claims into securities in a new holding company. The FDIC and the SEC are working to establish appropriate standards. - Foreign firms issuing securities in the U.S. are subject to Form 20-F and Form 6-K; eligible foreign firms under resolution could terminate reporting by de-registration. The SEC can also accept modifications by accepting disclosure requirements under foreign insolvency laws. - State Insurance. No specific issues arise; insurance companies are subject to market reporting, takeover provisions, listing rules, or securities disclosure requirements to a lesser extent than their holding companies and banks. - Findings and recommendation: - The U.S. regime does not explicitly contemplate an exemption from disclosure requirements for firms under resolution. - The “closed-firm” approach may mitigate disclosure concerns because the resolved firm is no longer operating on a going concern basis. - The SEC typically exercises discretion to accept modified reporting when firms undergo reorganization or bankruptcy. - The implementation of a Title II liquidation may present additional complexities given that a holding company will typically be the issuer of securities and the liquidation process will be protracted. - Recommendation: It is recommended that U.S. authorities (such as the FDIC, the SEC, and stock exchanges) continue to work to identify whether disclosure requirements applicable to a firm in resolution in line with EC 5.7 would warrant acceptance of modified reporting to facilitate preparedness where a Title II liquidation is commenced. ### Assessment of KA5 and concluding comments - The exercise of resolution powers is subject to safeguards and due process requirements in line with KA 5. - The U.S. resolution regime under DFA and FDI Act provides necessary flexibility to take speedy action in the interest of financial stability and preservation of the value of the resolved firm. - State insurance resolution regimes align with several features of KA 5 but do not permit departure from the principle of equal treatment of creditors on financial stability grounds. - Given the significant role of the courts in insurance receivership, timelines for resolution action in some insurance cases are likely to be a concern where quick action is required. *Italic: Source – _cr15171 - Section 403 A of IRMA requires that any rehabilitation plan be fair and equitable to all parties* ### 6. Funding of Firms in Resolution ### 6. Funding of Firms in Resolution ### Key Attributes (KA6) — summary - KA6.1: Jurisdictions should have statutory or other policies so authorities are not constrained to rely on public ownership or bail-out funds to resolve firms. - KA6.2: Where temporary sources of funding to maintain essential functions are needed to accomplish orderly resolution, the resolution authority or authority extending the temporary funding should make provision to impose any losses incurred on (i) shareholders and unsecured creditors subject to the “no creditor worse off than in liquidation” safeguard (see Key Attribute 5.2); and recover them (ii) if necessary, from the financial system more widely. - KA6.3: Jurisdictions should have in place privately-financed deposit insurance or resolution funds, or a funding mechanism with ex post recovery from the industry of the costs of providing temporary financing to facilitate the resolution of the firm. - KA6.4: Any provision by the authorities of temporary funding should be subject to strict conditions that minimise the risk of moral hazard, and should include: - (vi) a determination that the provision of temporary funding is necessary to foster financial stability and will permit implementation of a resolution option that is best able to achieve the objectives of an orderly resolution, and that private sources of funding have been exhausted or cannot achieve these objectives; and - (vii) the allocation of losses to equity holders and residual costs, as appropriate, to unsecured and uninsured creditors and the industry through ex-post assessments, insurance premium or other mechanisms. - KA6.5: As a last resort, some countries may decide to have a power to place the firm under temporary public ownership and control to continue critical operations while seeking a permanent solution; where such powers exist, provision should be made to recover any losses incurred by the state from unsecured creditors or, if necessary, the financial system more widely. ### Essential Criteria (EC6) — arrangements for temporary financing - EC6.1: Legal framework establishes arrangements to provide temporary financing to support the use of the resolution powers set out in KA 3, which include one or a combination of: - (i) a privately funded resolution fund; - (ii) a privately funded protection scheme (for example, for deposits or insurance policy holders); - (iii) a privately funded fund with combined deposit or policy holder protection and resolution functions; - (iv) recourse to public funds, coupled with a mechanism for recovery from the industry of any losses incurred in the provision of public funds. - EC6.2: If recourse to public funds is provided under EC 6.1(iv), financing is made available only if: - (i) it has been assessed as necessary for financial stability by supporting the implementation of a resolution option that best achieves the statutory objectives of resolution (see KA 2.3); - (ii) private sources of funding have been exhausted or would not achieve those objectives; and - (iii) losses are allocated to shareholders and, as appropriate, to unsecured and uninsured creditors (in accordance with the hierarchy of claims) and, if necessary, public funds are recovered from the financial industry through assessments or other mechanisms. - EC6.3: If the regime includes temporary public ownership as part of resolution, it is subject to: - (i) the failure of the firm, or its resolution through all other options, would cause financial instability; and - (ii) clear rules regarding the allocation of losses to shareholders and creditors or, if necessary, recovery from financial system participants more widely. ### Description and findings — United States framework - DFA (Orderly Liquidation Fund, OLF): - DFA provides an OLF mechanism for temporary public funding to support resolution of a failed covered financial company.172 - FDIC borrowing for liquidation of a covered financial company may not exceed: - (i) an amount equal to 10 percent of the total consolidated assets of the company during the first 30 days of the receivership, followed by - (ii) an amount equal to 90 percent of the fair value of the total consolidated assets of the company that are available for repayment, once this has been calculated by the FDIC. - FDIC and U.S. Treasury issued a joint rule173 regarding calculation of the maximum obligation limitation (broad interpretation of assets available for repayment, including secured assets). - The Treasury Secretary may not purchase obligations unless agreement with the FDIC provides a specific plan for repayment and demonstrates FDIC income from assets and assessments will amortize borrowings within a specified time period. - Unclear whether OLF can be used to assist a covered insurance company under state insurance resolution law because OLF availability is tied to FDIC appointment as receiver. - Deposit Insurance Fund (DIF) and FDIC authorities: - DIF is funded on an ex-ante basis by assessments on IDIs.174 - DIF may be used by the FDIC in connection with resolution of, and deposit insurance payouts associated with, IDIs, and FDIC generally must exercise authorities on a least cost basis.175 - FDIC has standing authority to borrow $100 billion from the U.S. Treasury if necessary for deposit insurance purposes176 to be repaid through assessments on IDIs. - As of December 31, 2014, the DIF had a fund balance of US$62.8 billion. The DIF's ratio of reserves to estimated insured deposits as of September 30, 2014, was 0.89 percent. - DFA increased the minimum reserve ratio (removed a hard cap previously at 1.25 percent and then 1.5 percent) and gave FDIC discretion to set a higher target; FDIC Board set a target of 2 percent, and on current assessment rates this will not be reached before 2027. - DFA changed the assessment base from average total domestic deposits to average total consolidated assets minus average tangible equity and changed methodology for calculating risk based assessments on large and complex banks. - State insurance guaranty associations and funds (GAs/GFs): - Nationwide system of state guaranty funds exists to provide protection of policy holders; most states have separate GA for life and health and funds for property and casualty. NAIC developed model legislation. - Insolvency and court liquidation in domiciliary state trigger statutory obligations of each GF/GA to provide coverage for residents; limits defined by state legislation. Costs recouped from proceeds of liquidation and, if necessary, ex post assessments on GA/GF members. - Life and health GAs may provide resources to the receiver to fund transfers of policies to a healthy acquirer or provide guaranties; GAs assess costs of payouts over time versus cost of transfer. - Two nationwide associations—NOHLGA and the National Conference of Insurance Guaranty Funds—coordinate state GA responses. - Two issues for systemically important insurers: - (1) Life and health GAs are permitted but not required to provide funding in receiverships not involving insolvency and liquidation orders (property and casualty funds do not have this flexibility). Historically GAs are reluctant to provide such financing and coordination across states would be necessary, so guaranty system availability to finance pre-insolvency resolution actions is doubtful. Any such provision would be narrowly for policy holder protection and not for broader resolution objectives such as preserving financial stability (KA 2.3). - (2) Financial capacity of GAs/GFs to address failure of a systemically important insurer is a concern given reliance on ex post funding; GAs can borrow from commercial banks and life and health GA report a borrowing capacity of about $10 billion per year, but not from the public sector. - Findings summary (DFA / Banking / State Insurance): - Legal framework provides for temporary recourse to public funds with mechanism for ex post recovery from the financial industry for covered financial companies. - Deposit insurance fund (DIF) is privately funded on an ex ante basis with combined deposit protection and resolution functions for failed IDIs. - GAs and GFs are only required to disburse upon insolvency and liquidation order and for narrow policy holder protection; while permitted to provide pre-insolvency funding in some cases, GAs are unlikely to do so. ### Description and findings — EC6.2 specific treatment - DFA and Title II discretionary use of OLF: - DFA provides FDIC as receiver discretion to determine that use of borrowings from the OLF is necessary or appropriate.177 - FDIC as receiver is bound by statutory objectives under Title II to resolve failing financial companies that pose significant risk to U.S. financial stability in a manner that mitigates risk and minimizes moral hazard, ensuring: - creditors and shareholders will bear the losses of the financial company; - management responsible will not be retained; and - FDIC and other agencies will take steps so all parties responsible bear losses consistent with responsibility, including actions for damages, restitution, and recoupment.178 - DFA requires FDIC as receiver to determine that action under Title II, including temporary public funding, is necessary for U.S. financial stability and not for preserving the financial company.179 - FDIC intends to maximize use of private sector funding; only if unavailable would FDIC utilize the OLF as temporary back-up liquidity.180 181 - Borrowings from OLF are treated as administrative expenses or amounts owed to the U.S. under creditor hierarchy182 and are first repaid from recoveries on the assets of the failed company.183 - If recoveries insufficient to repay OLF funds, FDIC must impose assessments on any claimant that received additional sums (except necessary payments to initiate and continue essential operations),184 but such payments seem unlikely unless made in error. - By law, taxpayers shall bear no losses from exercise of Title II authorities.185 - To the extent recoveries are insufficient to repay OLF borrowings, FDIC would impose risk-based assessments on: - BHCs with total consolidated assets equal to or greater than $50 billion; - financial companies with total consolidated assets equal to or greater than $50 billion; and - NBFC supervised by the FRB.186 - Title II requires FSOC to recommend calibration of assessments and the FDIC to issue implementing regulations in consultation with the Treasury Secretary; to date, such regulations have not been prepared. - DIF borrowing history and least-cost rule: - FDIC can borrow from U.S. Treasury for deposit insurance if DIF insufficient.187 Any borrowings are obligations of the DIF to be repaid by levying on IDIs.188 - DIF went into deficit during last crisis when number of bank failures increased; DIF reached an $8.2 billion deficit by end September 2009 and FDIC adopted a DIF Restoration Plan including a one-off mid-year assessment and mandating banks to pay an estimated three years of deposit insurance premiums in advance. FDIC’s line of credit from U.S. Treasury was increased from $30 to $100 billion but not drawn. - Least cost resolution requirement in FDI Act (with systemic risk exception) means losses would be allocated to shareholders and as appropriate unsecured and uninsured creditors. ### Findings and assessment of KA6 and ECs - Findings: - The U.S. legal framework provides temporary recourse to public funds coupled with ex post recovery mechanisms for covered financial companies. - The DIF is an ex-ante privately funded deposit insurance fund with combined deposit protection and resolution functions for failed IDIs. - GAs/GFs are required to disburse only upon insolvency and issuance of liquidation order for policy holder protection; life and health GAs may be permitted to provide pre-insolvency funding but are unlikely to do so. - Insurance GAs/GFs do not have access to public funds; it is unclear whether GA would have access to OLF under § 210(n) DFA. - FDIC has not issued implementing rules on risk-based assessments required under Title II. - Assessment comment: - The OLF and DIF arrangements are available to provide temporary financing to support the KA3 resolution powers, including mechanisms for temporary recourse to public funds limited to specified circumstances. The GAs/GFs are only required to disburse in event of insolvency for policy holder protection; life and health guaranty associations have discretion to disburse earlier but are unlikely to provide temporary financing pre-insolvency to support KA3 resolution powers. *Source: IMF staff assessment, chapter "6. Funding of Firms in Resolution" from the United States country report.* ### 7. Cross-border Cooperation ### 7. Cross-border Cooperation ### Key Attributes (KA) - KA 7.1 The statutory mandate of a resolution authority should empower and strongly encourage the authority wherever possible to act to achieve a cooperative solution with foreign resolution authorities. - KA7.2 Legislation and regulations in jurisdictions should not contain provisions that trigger automatic action in that jurisdiction as a result of official intervention or the initiation of resolution or insolvency proceedings in another jurisdiction, while reserving the right of discretionary national action if necessary to achieve domestic stability in the absence of effective international cooperation and information sharing. Where a resolution authority takes discretionary national action it should consider the impact on financial stability in other jurisdictions. - KA7.3 The resolution authority should have resolution powers over local branches of foreign firms and the capacity to use its powers either to support a resolution carried out by a foreign home authority (for example, by ordering a transfer of property located in its jurisdiction to a bridge institution established by the foreign home authority) or, in exceptional cases, to take measures on its own initiative where the home jurisdiction is not taking action or acts in a manner that does not take sufficient account of the need to preserve the local jurisdiction’s financial stability.* Where a resolution authority acting as host authority takes discretionary national action, it should give prior notification and consult the foreign home authority. - KA7.4 National laws and regulations should not discriminate against creditors on the basis of their nationality, the location of their claim or the jurisdiction where it is payable. The treatment of creditors and ranking in insolvency should be transparent and properly disclosed to depositors, insurance policy holders and other creditors. - KA7.5 Jurisdictions should provide for transparent and expedited processes to give effect to foreign resolution measures, either by way of a mutual recognition process or by taking measures under the domestic resolution regime that support and are consistent with the resolution measures taken by the foreign home resolution authority. Such recognition or support measures would enable a foreign home resolution authority to gain rapid control over the firm (branch or shares in a subsidiary) or its assets that are located in the host jurisdiction, as appropriate, in cases where the firm is being resolved under the law of the foreign home jurisdiction. Recognition or support of foreign measures should be provisional on the equitable treatment of creditors in the foreign resolution proceeding. - KA7.6 The resolution authority should have the capacity in law, subject to adequate confidentiality requirements and protections for sensitive data, to share information, including recovery and resolution plans (RRPs), pertaining to the group as a whole or to individual subsidiaries or branches, with relevant foreign authorities (for example, members of a CMG), where sharing is necessary for recovery and resolution planning or for implementing a coordinated resolution. - KA 7.7 Jurisdictions should provide for confidentiality requirements and statutory safeguards for the protection of information received from foreign authorities. *This should not apply where jurisdictions are subject to a binding obligation to respect resolution of financial institutions under the authority of the home jurisdiction (for example, the EU Winding up and Reorganisation Directives).* ### Essential criterion EC7.1 — Legal barriers to cooperation - EC7.1 The legal framework does not create any material barriers to cooperation with foreign resolution authorities, including by providing for automatic action as a result of official intervention or the initiation of resolution or insolvency proceedings in other jurisdictions that could undermine a cooperative solution. Findings and description re EC7.1: - DFA: The FDIC, as receiver for a covered financial company, is required to coordinate, to the maximum extent possible, with the appropriate foreign financial authorities regarding the orderly liquidation of any covered financial company that has assets or operations in a country other than the U.S. 190 - Banking: No provision similar to the one under DFA, noted above, exists under the FDI Act. While the FDI Act does not create any material barriers to cooperation with foreign resolution authorities, the FDIC is not required to take into account the impact of the resolution measure taken by the FDIC on financial stability in the relevant foreign jurisdictions. - U.S. branches: Federal and state-licensed uninsured branches of foreign firms are subject to different, specific resolution regimes.191 - Under the IBA, the authority to operate a federal branch shall terminate, on an automatic basis, when the parent foreign bank is dissolved or its authority or existence is terminated or cancelled in its country. Upon such termination, the OCC may appoint a receiver, who will take possession of all the property and assets of the foreign bank in the U.S. The OCC may exercise this power also when any creditor obtains a judgment arising from a transaction with the federal branch and such judgment has remained unpaid for thirty days, as well as whenever it becomes satisfied that the foreign bank is insolvent or other grounds broadly related to the financial soundness of the foreign bank or the branch are met. The proceeds from the receivership process shall be returned to the foreign bank’s home office only after all depositors and creditors who have transacted with the U.S. branches have been satisfied. The OCC has never exercised its receivership authority under the IBA. The OCC may also, alternatively, appoint a conservator, having all the powers to operate the bank, or may choose to dissolve or liquidate the branch under the national bank voluntary dissolution provisions. - The resolution regime for state-licensed branches of foreign firms varies across states. Under the New York Banking Law, when a foreign banking corporation is dissolved or its authority or existence is terminated or cancelled in its jurisdiction, a certificate is required to be filed with the Superintendent of the Department of Financial Services (the “Superintendent”), and the filing has the same effect as a revocation of the license. The Superintendent may, in his discretion, take possession of the business and property in New York (NY) of a foreign banking corporation upon a variety of grounds. Once it takes possession, the Superintendent shall liquidate or deal with such business and property in accordance with the liquidation regime. Proceeds of the liquidation go first to pay the claims of creditors arising from the transaction of business with the NY branch. After claims against the branch are satisfied, any excess proceeds are paid over, upon court order, to any liquidators of the foreign bank’s other U.S. branches or offices. Only after such claims are satisfied are any remaining proceeds returned to the principal office of the foreign bank. - State Insurance: State insurance commissioners are given broad authority to share information with foreign supervisors and resolution authorities where adequate confidentiality arrangements are in place. State insurance commissioners in some states may commence conservatorship proceedings with respect to the assets of a non-U.S. insurer not domiciled in the relevant jurisdiction. However, there is nothing that requires state insurance commissioners to cooperate with their foreign counterparts. - No automatic triggers require a state commissioner to commence receivership proceedings against a foreign branch in particular circumstances (for example, if the parent is subject to foreign resolution proceedings or has lost its license in the home jurisdiction). The framework for liquidation effectively relies upon the ring-fencing of assets for the satisfaction of the claims for the branch’s creditors. Rehabilitation or liquidation of a foreign insurer’s U.S. branch in its “state of entry” will be conducted as if the branch were a separate legal entity; in liquidation, the assets of the branch will need to be distributed to satisfy the claims of the branch’s creditors. Foreign branches, as a condition for entry into the state, will often be required to put in place “trusteed assets” that will be used to satisfy claims of the branch’s creditors in liquidation. - Overall findings for EC7.1: - While no material barriers to cooperation are provided under the DFA and the FDI Act, the FDI Act contains no reference to cooperation requirements with foreign authorities. The DFA’s cooperation mechanism applies only with respect to the commencement of a Title II proceeding in the U.S. and does not reflect the possibility that a resolution proceeding be commenced in a foreign jurisdiction. - It may not be fully clear how the duty of cooperation for the FDIC could be interpreted, given its broader mandate as a resolution authority and that the triggers of a resolution under Title II refer to the effects of resolution actions on financial stability in the U.S. It is therefore recommended that the cooperation requirements under the DFA be appropriately clarified and broadened and that a similar mechanism be added under the FDI Act. - The regime for federal and state-licensed uninsured branches may undermine a cooperative solution. OCC or state banking authorities’ powers are discretionary. Insolvency or resolution proceedings could automatically result in termination of the authority to operate the branch or agency, but the OCC or state authority would have discretion in handling wind-down, potentially leading to receivership and a statutory responsibility to protect interests of creditors of U.S. uninsured branches. This may lead them to take action aimed at preserving the assets of the U.S. uninsured branches to the primary satisfaction of such creditors and to the possible detriment of a cooperative solution.192 - State insurance receivership frameworks that require assets to be used for the benefit of the branch’s creditors are a material barrier to cooperation. - Recommendation: Amend relevant frameworks for both banking and insurance resolution to require the authorities involved in the resolution of a systemic U.S. uninsured branch of a foreign firm to cooperate with the competent foreign resolution authority. - The provisions of the IBA and relevant state laws seem outdated and prone to conflicting interpretations. If commencement of a resolution proceeding in the home country qualifies as a “cancellation or termination” under the IBA or NY Banking Law, the mandatory consequence would be revocation of the bank license—automatic action that would conflict with EC 7.1. References and citations appearing in the text: - DFA Section 210(a)(1)(N).190 - For the federal regime, see, among other provisions, Section 4(i) and 4(j) of the IBA and the Bank Conservation Act (12 US Code § 206). For the NY regime, see, among other provisions: N.Y. Banking. Law Article 2 §14 1(p); Article 5 §206; Article 13 §606; Articles 13 §618(a), §618-a and 634.191 ### Essential criterion EC7.2 — Mechanisms to give effect to foreign resolution measures - EC7.2 The legal framework of the jurisdiction under review establishes clear and transparent mechanisms or processes through which actions by a foreign resolution authority can be given prompt legal effect in the jurisdiction under review, either by way of recognition or by taking supportive measures under the domestic resolution regime. Those mechanisms or processes are sufficient to enable such legal effect to be achieved whatever the form of a foreign firm’s establishment or operations in the jurisdiction under review (for example, subsidiary, branch or only assets within the jurisdiction) and, where a firm is being resolved under the law of a foreign jurisdiction, enable the foreign resolution authority to gain rapid control over the firm (branch or shares in a subsidiary) or its assets that are located in the jurisdiction under review. Description and findings re EC7.2: - General considerations: Chapter 15 of the Bankruptcy Code is the primary tool for recognition of foreign insolvency proceedings, drawing upon the Model Law on Cross-Border Insolvency. Foreign proceedings will not be recognized under Chapter 15 if they are “manifestly contrary to the public policy of the United States”; U.S. courts have narrowly interpreted this public policy exception. However, foreign banks with a branch or agency in the United States are not eligible for recognition under Chapter 15.193 - Chapter 15 of the Bankruptcy Code: - Chapter 15 may be relevant where a foreign bank has assets or liabilities in the U.S. or governed by U.S. law; it may represent an avenue through which a foreign resolution authority could obtain recognition of a foreign resolution measure in the U.S., provided such measure comports with principles of fairness, and subject to local authorities’ actions.194 - Although foreign resolution proceedings of foreign banks with branches or agencies in the United States would not be eligible for recognition under Chapter 15, a U.S. court may, in theory, recognize a foreign proceeding in accordance with judicial principles of comity and based on principles enshrined in Chapter 15. - Chapter 15 may provide an avenue for recognition of resolution measures adopted by a foreign resolution authority in respect of a foreign insurer, although its use in insurance has been rare. Chapter 15 precludes a court from granting relief with respect to any deposit, escrow or trust fund or security required or permitted under any applicable state insurance law or regulation—effectively amounting to ring-fencing of assets held in trust for U.S. stakeholders. - Chapter 15 will be of limited use where the foreign insurer (for example, a U.S. branch of the insurer) is the subject of a state receivership proceeding; a U.S. court will be very reluctant to grant relief inconsistent with the U.S. receivership. - Upon filing a petition for recognition, the foreign representative may request provisional relief; federal and state courts are required to grant comity or cooperation to the foreign representative, but courts may refuse action if “manifestly contrary to the public policy of the U.S.” Upon recognition, a court may entrust distribution of the debtor’s assets to the foreign representative if interests of creditors in the U.S. are sufficiently protected. Standards for recognition under Chapter 15 of a foreign resolution proceeding of a bank or insurer are not clearly defined.195 - Policy proposals include revising Chapter 15 to cater for its application to U.S. branches or issuing a general policy statement clarifying that actions by foreign resolution authorities would be supported and enforced under principles of comity, provided U.S. financial stability is preserved. - DFA: The DFA provides limited means to give prompt legal effect to foreign resolution authority actions. The FDIC, as receiver for a covered financial company, is required to coordinate, to the maximum extent possible, with appropriate foreign financial authorities regarding orderly liquidation of any covered financial company with assets or operations outside the U.S. In this manner, it could conceivably support a foreign resolution. Limitations: - DFA does not apply to domestic branches of foreign banks or insurance companies, so scope of support is limited. - Any support is limited by objectives of Title II, which refer only to financial stability in the U.S. and do not consider financial stability in host jurisdictions. - Support is subject to initiation of a Title II proceeding, with FDIC appointed as receiver for the covered financial company. - Banking (FDI Act): The FDI Act does not provide mechanisms or processes through which actions by a foreign resolution authority can be given prompt legal effect either by recognition or by taking supportive measures. - U.S. branches: A foreign resolution proceeding of a foreign bank with U.S. branches may be recognized under comity in some circumstances, but standards are not clearly defined. The extent to which the OCC, a receiver appointed by it, or state authorities would take supportive measures is case-by-case. Federal or state authorities have statutory responsibility to protect interests of creditors of U.S. uninsured branches and would likely take action aimed at preserving assets of the uninsured branches to the primary satisfaction of such creditors, particularly if creditor recoveries would be lower absent ring-fencing—potentially prejudicial to a cooperative solution. It is also unlikely a U.S. court will override local authorities’ determinations to initiate liquidation or ring-fencing. - State Insurance: Insurance resolution laws of many states provide some mechanisms that could, in principle, give effect to foreign resolution measures. For example, where a foreign insurer has assets in a state and no receiver/liquidator has been appointed in the domiciliary jurisdiction, many insurance receivership laws empower the state commissioner to apply to court for orders to conserve property or liquidate assets. The court has broad discretion to order appropriate action, which could include support of foreign resolution measures, but that would depend on what action is “appropriate.” Liquidation of a foreign branch under state insurance law will be treated as a separate legal entity and its assets used to satisfy the branch’s creditors. Overall findings for EC7.2: - In the case of banks, there is no general statutory mechanism in the U.S. framework to give prompt legal effect in the U.S. to actions taken by a foreign resolution authority, either by recognition or by taking supportive measures. There may be circumstances where a foreign resolution proceeding may be recognized in the U.S., either under Chapter 15 or judicial comity, but standards and scope are limited and unclear. *Source: IMF staff analysis in _cr15171 - 7. Cross-border Cooperation_* ### Chapter 15 or pursuant to the general principle of comity, which is well-established in U.S. ### _cr15171 - Chapter 15 or pursuant to the general principle of comity, which is well-established in U.S. ### EC7.3 — Recognition or support of foreign measures conditional on equitable treatment of local creditors - Description: - Chapter 15 of the Bankruptcy Code: courts may refuse to take any action under Chapter 15, including recognizing a foreign proceeding, if the action would be “manifestly contrary to the public policy of the U.S.” When authorizing certain measures—such as entrusting the distribution of the debtor’s assets to the foreign representative or another person—the court must also be satisfied that the interests of creditors in the U.S. are sufficiently protected. - Other frameworks: No specific provisions exist with respect to ensuring equitable treatment of local creditors as a condition to recognizing or supporting foreign resolution measures. Limited scope for recognition or support in state banking or insurance resolution frameworks. Any action taken to give effect to foreign resolution measures would be expected to seek equitable treatment of local creditors given the resolution framework’s design to protect local stakeholders. - Findings: - Chapter 15 contains certain safeguards aimed at protecting creditors in the U.S. - Where Chapter 15 does not apply, there are no express provisions regarding equitable treatment of creditors of a foreign bank or insurer located in the U.S., though such treatment can be inferred from the overall resolution framework. - Recommendation: - It is recommended that the U.S. regime be examined holistically and be strengthened to establish clear and transparent mechanisms or processes through which actions by a foreign resolution authority can be given prompt legal effect in the U.S. resolution regime. ### EC7.4 — Authority to exercise resolution powers over local branches to support foreign resolution or act independently - Description: - Federal and state-licensed uninsured branches: under the IBA, upon revocation of the branch license or other grounds, the OCC may appoint a receiver who shall take possession of the property and assets of the foreign bank in the U.S. and exercise the same rights, powers and authority as receivers of national banks appointed by the OCC under the National Banking Act.196 - For federally licensed uninsured branches of foreign banks, the law does not specify who the OCC may appoint as a receiver. The scope of powers permitted under the National Banking Act is limited to winding up the business and distribution of assets to creditors of uninsured branch.197 - For insured federal branches grandfathered by the Federal Deposit Insurance Corporation Improvement Act, the OCC must appoint the FDIC as receiver; the FDIC would conduct the receivership in accordance with the FDI Act. - State-licensed uninsured branches: subject to state law resolution regimes. Example (NY): Superintendent, upon taking possession, shall liquidate or deal with such business and property in accordance with the liquidation regime, providing for satisfaction of creditors which had transactions with the NY uninsured branch on a priority basis. Court authorization required to turn over proceeds from the liquidation to other offices of the foreign bank organization being liquidated in the U.S. Superintendent (or appointee) may sell property and assets without approval of shareholders and any court. Nothing specified regarding consents to transfer required under contract law or transfer of liabilities. - The act of taking possession by the Superintendent may be stayed upon court challenge. A general provision allows the Superintendent “to make variations from the requirements of the Banking Law,” if “necessary because of the existence of unusual and extraordinary circumstances,” but the precise scope is unknown. - Counterparties to QFCs can exercise early termination rights and seize collateral; NY Banking Law does not provide for a temporary stay from such early termination rights. - State insurance: no apparent requirement that a state commissioner initiate receivership proceedings for a branch of a foreign insurer that is subject to resolution abroad; commencement is discretionary based on specified triggers including where a foreign appointment “might oust the courts” of the state “or might prejudice orderly delinquency proceedings” in the state. - Resolution planning and the CMG framework may provide opportunity for selected state commissioners to design appropriate resolution strategies for local branches in cooperation with foreign counterparts; discussions are at an early stage. - Liquidation of the branch results in ring-fencing of its assets to satisfy branch creditors’ claims. - Findings: - Receivers (OCC-appointed or state authorities) may take discretionary action to support foreign home authority resolution, but statutory provisions are unlikely to lead to consistent support. - OCC receiver powers focus on winding up the federal uninsured branch and distribution of assets. - Superintendent powers are broader but contain uncertainties and conflicting provisions (e.g., creditors’ consent to transfers). - Statutory duty to preserve uninsured branch assets in the U.S. and satisfy creditors with transactions with the branch on a priority basis may hinder support for foreign resolution action, even when the branch may be systemic in the home country. - Insurance branch liquidation regime similarly ring-fences assets to benefit branch creditors. - Recommendation: - It is recommended that the U.S. resolution regime be amended to require relevant U.S. authorities to cooperate with foreign and domestic resolution authorities in the context of resolution of a foreign bank with a U.S. branch. (See also recommendations under KA 1.) - Consideration could be given to amending the insurance framework to provide greater flexibility to cooperate in a foreign resolution proceeding. ### EC7.5 — Prior notification and consultation with home resolution authority before exercising resolution powers independently - Description: - DFA: No specific requirement exists for prior notification to, or consultation with, a home resolution authority when U.S. authorities take resolution action on their own initiative. U.S. authorities have negotiated cooperation agreements to alert home authorities when it becomes apparent that a domestic branch or incorporated entity is likely to enter resolution, but these agreements are non-binding and do not align with EC7.5 requirements. - Banking: same finding. - U.S. Federal and State Branches: same finding. - State Insurance: initiation of receivership typically requires insurer be given notice and right to a hearing, but state resolution laws generally do not provide for prior notice to the relevant foreign resolution authority. Supervisory colleges, CMGs and COAGs may provide opportunity to put policies for prior notice to select foreign resolution authorities, but no such policies are in place. - Findings: - The U.S. resolution regime does not require notification or consultation with the home resolution authority prior to exercising resolution powers in relation to a local subsidiary or branch of a foreign firm. - Recommendation: - It is recommended that such a requirement (prior notice and consultation with the home resolution authority) be included in the U.S. resolution regime. ### EC7.6 — Non-discrimination between creditors of same class regardless of nationality or location of claim - Description: - DFA: No provision of the DFA discriminates between creditors on the basis of nationality, location of claim, or jurisdiction where claim is payable. - Banking: - Under the FDI Act, creditors are not discriminated against based on nationality. However, location and jurisdiction in which a depositor claim is payable may impact the hierarchy of creditor claims upon resolution of an IDI. - Deposit liabilities are reimbursed by the receiver of a failed IDI before any general or senior liability of that institution.198 This depositor preference rule includes claims of both insured and uninsured deposits (with FDIC as subrogee of insured deposits), but “deposit liabilities” is not statutorily defined. - FDIC rule-making clarified that “deposit liability”, for depositor preference purposes, includes a foreign branch deposit only if it is a “dually payable deposit”, i.e. payable at both the foreign branch and at a U.S. office of the failed IDI.199 - Therefore: - Dually payable foreign branch deposits are treated as deposit liabilities (albeit uninsured deposits) and enjoy depositor preference. - Deposits payable only at the foreign branch do not enjoy priority status and are treated as unsecured liabilities, below deposit liabilities. - Treatment of a deposit held in a foreign branch of a U.S. chartered bank depends on the deposit agreement terms between depositor and bank. - State Insurance: State resolution laws do not discriminate between creditors of the same class on basis of nationality, location of claim, or jurisdiction where claim is payable. NAIC model laws and most state receivership laws do not provide differential treatment on these bases. - Findings: - Making foreign branch deposits subject to depositor preference only if dually payable contradicts EC7.6, which identifies location where claim is payable as a possible ground of discrimination. - Foreign branch deposits should rank in the same order as other depositors as they belong to the same class, but they have a lower ranking if not payable in the U.S. - Subordination of non-dually payable foreign branch deposits to home country depositors may hinder cross-border resolution and complicate recognition or enforcement of U.S. resolution proceedings by third countries. - Recommendation: - It is recommended that the U.S. regime be amended to subject foreign branch deposits to the depositor preference rule, whether or not they are dually payable in the U.S. ### Assessment of KA7 — Cross-border recognition, cooperation, and depositor preference issues - Comments: - Recognition under Chapter 15 or by comity exists in certain circumstances, but the U.S. lacks an explicit statutory provision to give prompt effect to foreign resolution measures for banks. - DFA requires the FDIC as receiver to coordinate, to the maximum extent possible, with appropriate foreign resolution authority in connection with a resolution under Title II; this cooperation mechanism could be clarified and broadened and a similar mechanism could be added to the FDI Act. - No requirement exists to notify and consult with the home resolution authority prior to exercising resolution powers in the U.S. - Liquidation regimes of U.S. branches of foreign institutions may undermine cross-border cooperation. - U.S. depositor preference rule discriminates depending on whether the deposit is payable in the U.S., inconsistent with EC7.6. ### KA8 / EC8.1 — Crisis Management Groups (CMGs) for G-SIFIs - Description: - In line with FSB policy framework and G20 endorsement, U.S. authorities have established CMGs for eight U.S. G-SIBs: JP Morgan Chase, Citibank, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street and Wells Fargo.200 - CMG membership for U.S.-based G-SIBs includes the FDIC; the FRB and relevant Federal Reserve Bank; the OCC (for G-SIBs with significant nationally chartered banks); and the SEC (for G-SIBs with large broker-dealer activity). The U.S. Treasury is not represented, despite its role in the “three keys” process and the reference in KA 8.1 to finance ministries. - Host authorities participating in CMGs include supervisory authorities, central banks, resolution authorities, and deposit guarantee schemes from jurisdictions where U.S. G-SIBs have significant activities or assets. - CMG membership is reviewed annually by the FRB, in consultation with the FDIC. Membership criteria are not explicitly defined; in practice membership is based on relative importance of local activities for the firm (e.g., assets and revenues). - CMGs have also been established for two G-SIIs: American International Group and Prudential Financial. For both firms, FSOC determined potential material financial distress could threaten U.S. financial stability, subjecting them to FRB supervision and enhanced prudential standards.201 - Findings: - CMGs are established and maintained for U.S. G-SIFIs; membership practices and review mechanisms are in place though the U.S. Treasury is not represented in CMGs despite its role. *Italic: Extracted from the source content unit _cr15171 - Chapter 15 or pursuant to the general principle of comity, which is well-established in U.S.* ### section 113 (h) in the U.S. District Court for the District of Columbia for the rescindment of this ### _cr15171 - section 113 (h) in the U.S. District Court for the District of Columbia for the rescindment of this ### Establishment and status of CMGs - A CMG for MetLife is expected to be initiated at the earliest in 2016, given the pending outcome of the law suit challenging the final determination in January 2015. The outcome of the law suit is pending. - For the G-SIBs, CMGs have allowed agencies to: - disseminate firms’ recovery strategies; - discuss cross-border resolution issues (e.g. legal rights, duties and obligations under the local laws of host jurisdictions, actions that can be taken by host authorities to facilitate continued access to financial market infrastructures); - discuss DFA Title II resolution strategies (with the latter gravitating around the FDIC’s SPE strategy) and steps to improve resolvability (as guided by the FDIC’s firm-specific resolvability assessments). - Recent CMGs included preliminary discussions on the nature, amount and distribution of gone-concern loss absorbing capacity that may be required in a Title II resolution to recapitalize the relevant firms. - For the G-SIIs, whose CMGs were only established in 2014, discussion topics included the recovery and resolution planning process, cooperation matters and matters pertaining to information sharing. - Banking: The FDI Act does not include specific statutory provisions that relate to CMGs. - State Insurance: There are no specific statutory provisions in state law regarding CMGs of insurance companies. ### Cooperation with non-CMG host jurisdictions (EC8.3) - There is no formalized process in place to assess the systemic presence of G-SIFIs’ operations in non-CMG host jurisdictions. - DFA / FBAs approach: - Foreign operations of U.S.-based G-SIBs are reviewed as part of the FBAs approach to enterprise-wide supervision. - The FBAs have established robust processes for maintaining a comprehensive understanding of firms’ structures, their material activities, corporate governance arrangements and risk management programs—both within the U.S. and abroad. - Agencies have established colleges of supervisors that generally have a broader range of participants than CMGs. - The FBAs share information bilaterally with home and host supervisors, either on the basis of formal arrangements (such as memoranda of understanding) or in response to ad hoc requests. - The legal framework allows the FBAs to share relevant supervisory information with foreign banking supervisors, even in the absence of formal arrangements, provided that the recipient itself is subject to confidentiality requirements. - Insurance sector: - Domiciliary state insurance commissioners have established colleges of supervisors for all insurance groups that meet the International Association of Insurance Supervisors’ definition of an internationally active insurance group (IAIG), including for the FSOC-designated U.S.-based G-SIIs. - Prior to CMGs, supervisory colleges—organized in coordination with NAIC—were used as a forum for preliminary discussions on crisis preparedness and crisis management arrangements. - Inaugural CMG meetings for the two G-SIIs in Q4-2014 were considered helpful to foster dialogue on recovery and resolution planning, frameworks for cross-border cooperation and participants’ legal authority to share relevant information. - From the U.S. perspective, state and federal authorities involved in the supervision of insurance firms have adequate powers to share information with foreign supervisory authorities to coordinate preparations for a crisis management and coordination. - Banking: The FDI Act does not include specific statutory provisions that relate to CMGs. - State Insurance: There are no specific statutory provisions in state law regarding the cooperation with non-CMG members. - Findings and recommendation: - The CMGs operate in parallel to supervisory colleges for the U.S.-based G-SIBs and G-SIIs (the latter identified as IAIGs). - Supervisory colleges comprise more members than CMGs and can help facilitate coordination with non-CMG members. - Going forward, the U.S. authorities should endeavor to align current practices for cooperation with non-CMG host authorities with the draft guideline for cooperation and information-sharing with host authorities from jurisdictions that are not represented on CMGs, published by the FSB in October 2014. ### Participation in foreign CMGs (EC8.4) - The FBAs, together with relevant state supervisors, participate in CMGs for non-U.S. G-SIBs from France, Germany, Japan, Spain, Switzerland and the United Kingdom. - On behalf of the U.S. authorities, participants include the FDIC; the Federal Reserve System; the OCC and relevant state supervisors. Relevant state insurance commissioners and international insurance regulators also participate in CMGs for foreign G-SIIs. - The U.S. authorities have not declined any invitations to participate in CMGs of foreign G-SIBs and G-SIIs. - Banking: The FDI Act does not include specific statutory provisions that relate to CMGs. - State Insurance: There are no specific statutory provisions in state law regarding the participation in CMGs for foreign insurance companies. - Findings: The U.S. federal and state authorities participate in foreign CMGs when invited. ### Assessment and comments on KA8 - The establishment of CMGs for the U.S.-based G-SIBs and two of the three G-SIIs (a CMG for MetLife has not yet been established) has provided important fora for enhancing preparedness for, and facilitating the management and resolution of, cross-border distress. - The U.S. Treasury is not represented in CMGs, despite its role in the “three keys” process and the reference in KA 8.1 to finance ministries. - Existing modalities for cross-border coordination could be further strengthened via: - the development of explicit CMG membership criteria; - arrangements for cooperation and information-sharing with host authorities that are not represented on CMGs; - the development of consistent criteria for assessing the systemic presence of local operations in non-CMG host jurisdictions. ### Institution-specific cross-border cooperation agreements (COAGs) (KA9) - KA9.1 outlines minimum contents for institution-specific cooperation agreements, including objectives for CMGs, defined roles and responsibilities pre-crisis and during crisis, processes for information sharing (including legal bases and confidentiality arrangements), coordination in development of RRPs, processes for resolvability assessments, consultation procedures for material adverse developments, cross-border implementation details (bridge institution and bail-in), and meeting/review frequency requirements (annual meetings of top officials; at least annual reviews by appropriate senior officials of operational plans). - KA9.2: The existence of agreements should be made public; home authorities may publish the broad structure of the agreements if agreed by parties. ### Status and findings on COAGs (EC9.1, EC9.3) - U.S. home authorities have executed COAGs with 21 authorities from 11 jurisdictions for all seven U.S. G-SIBs with significant cross-border operations. - The COAG template reviewed covers: - Objectives: parties’ intentions regarding cross-border cooperation and information exchange, without creating binding obligations on the signatories. - General framework for cooperation: roles, responsibilities and powers of signatories in normal times and during crises. - Home and host commitments: development of the group-wide resolution plan, coordination of firm-specific resolvability assessments and commitment to take into account the overall effect of actions on financial stability in other jurisdictions (home authority); alerting the home authority without undue delay if local operations encounter material difficulties or are likely to enter the host authority’s resolution regime (host authorities). - Cooperation mechanisms and information sharing framework: meeting frequency, information to be exchanged and confidentiality arrangements. - Cross-border implementation of resolution measures: intention to work together to address potential impediments to cross-border implementation of resolution actions. - The preparation of multilateral COAGs for the U.S.-based G-SIIs remains ongoing. Discussions with relevant foreign authorities have been initiated but agreements are not expected to be finalized before parties have coalesced on credible resolution strategies. - The agencies have not taken any decisions on disclosure of the agreements. - Banking: The FDI Act does not include specific statutory provisions that relate to COAGs. - State Insurance: There are no specific statutory provisions in state law regarding COAGs. - EC9.3: At the time of the mission, multilateral COAGs for both the G-SIB and G-SII CMGs in which the U.S. authorities participate as host authority had not been finalized. The authorities are engaging in good faith negotiations towards the conclusion of the agreements. - Findings: COAGs for the U.S.-based G-SIIs have not yet been finalized; COAGs for foreign G-SIBs and G-SIIs have not yet been finalized. ### Assessment of KA9 and concluding comments - Pursuant to the obligation for the FDIC—in its capacity as receiver for covered financial companies under DFA’s Title II—to coordinate, to the maximum extent possible, with relevant foreign authorities on the orderly liquidation of a covered financial company that has assets or operations outside the U.S., the agencies have initiated extensive dialogues with relevant host authorities about aspects pertaining to resolution and resolution planning. - U.S. home authorities have executed COAGs with 21 authorities from 11 jurisdictions for all seven U.S. G-SIBs with significant cross-border operations. - The finalization of COAGs creates a firm anchor for future cooperation. *Source: IMF staff report content extracted from the provided PDF section.* ### 10. Resolvability Assessments ### 10. Resolvability Assessments ### Key activities and guidance - Resolution authorities should regularly undertake, at least for G-SIFIs, resolvability assessments that evaluate the feasibility of resolution strategies and their credibility in light of the likely impact of the firm’s failure on the financial system and the overall economy. Those assessments should be conducted in accordance with the guidance set out in Annex II. - In undertaking resolvability assessments, resolution authorities should in coordination with other relevant authorities assess, in particular: - (i) the extent to which critical financial services, and payment, clearing and settlement functions can continue to be performed; - (ii) the nature and extent of intra-group exposures and their impact on resolution if they need to be unwound; - (iii) the capacity of the firm to deliver sufficiently detailed accurate and timely information to support resolution; and - (iv) the robustness of cross-border cooperation and information sharing arrangements. - Group resolvability assessments should be conducted by the home authority of the G-SIFI and coordinated within the firm’s CMG taking into account national assessments by host authorities. - Host resolution authorities that conduct resolvability assessments of subsidiaries located in their jurisdiction should coordinate as far as possible with the home authority that conducts resolvability assessment for the group as a whole. - To improve a firm’s resolvability, supervisory authorities or resolution authorities should have powers to require, where necessary, the adoption of appropriate measures, such as changes to a firm’s business practices, structure or organisation, to reduce the complexity and costliness of resolution, duly taking into account the effect on the soundness and stability of on-going business. - Authorities should evaluate whether to require that systemically important functions be segregated in legally and operationally independent entities that are shielded from group problems. ### Essential criteria and jurisdictional findings - EC10.1 (home jurisdiction group resolvability assessments) - If the jurisdiction is home to one or more G-SIFIs, or domestically incorporated firms subject to resolution plans, arrangements and processes should be in place whereby the resolution authorities undertake, in cooperation with members of the firm’s CMG, group resolvability assessments regularly, including when there are material changes to the firm’s business or structure. - Description and findings re EC10.1: - DFA: The FDIC has undertaken initial assessments of the feasibility and credibility of the resolution strategies prepared under DFA Title II for the U.S.-based G-SIBs with significant cross-border operations. In accordance with FSB requirements, the assessments comprise: - (i) the identification of resolution strategies that would be feasible, in view of resolution tools available, the firm’s recovery and resolution plan; and the authorities’ capacity to apply the tools at short notice and other domestically incorporated banks that are subject to resolution planning requirements; - (ii) the credibility of all resolution strategies deemed feasible, in view of the likely impact of the firm’s failure on global and national financial systems and real economies; and - (iii) the determination of actions that may be necessary to improve resolvability, possibly including changes to the firm’s recovery and resolution plan, or its structure or operations. - Results of the FDIC’s preliminary assessments have been discussed in the CMGs of U.S.-based G-SIBs to deepen analysis of potential impediments to orderly resolution. - Documentation indicates the FDIC’s approach aligns with the FSB’s detailed guidance and covers: (a) firms’ structure and operations, (b) intragroup exposures, (c) continuity in FMI membership, (d) management information systems, and (e) coordination of national resolution regimes and tools; together with analysis of impact of a firm’s failure on financial markets, FMI, funding conditions, capital and the broader economy. - Where practicable, analyses are informed by SPE strategy modalities, including expectation that operating subsidiaries will remain intact and continuity of critical functions can be ensured. - At the time of the mission, the FDIC had not finalized similar assessments for smaller BHCs subject to resolution planning requirements. Agencies had not completed group resolvability assessments for NBFC that are deemed systemically important. - Banking: U.S.-based G-SIBs that have IDIs are required to submit resolution plans under the FDI Act; resolvability assessment is ongoing as part of group-wide resolution plans discussed in CMGs with FDIC participation. - State Insurance: State commissioners were not involved in preparation of resolvability assessments but have been consulted as part of agencies’ review of living wills. - Findings: Preparation of group resolvability assessments for G-SIBs is in train, with initial assessments discussed in banking CMGs. Similar assessments are not yet in train for designated NBFCs, and are not envisaged for other domestically incorporated firms, including other BHCs subject to Title I resolution planning requirements. - EC10.2 (host jurisdiction contribution) - If the jurisdiction is host to one or more G-SIFIs, or domestically incorporated firms subject to resolution plans, arrangements should be in place whereby the resolution authorities cooperate with the home jurisdiction and contribute to the development of resolvability assessments when invited by the home jurisdiction, including by sharing results of local resolvability assessments with the home authority. - Description and findings re EC10.2: - DFA: Preparation of resolvability assessments for G-SIFIs headquartered outside the U.S. is responsibility of the firm’s home authority. U.S. authorities contribute to group resolvability assessments for non-U.S.-based G-SIFIs to the extent they are represented in firm-specific CMGs. - Banking: Foreign-owned IDIs required to submit resolution plans under the FDI Act include banking groups designated systemic globally (e.g., Deutsche, HSBC, Santander). Resolvability assessment is ongoing as part of group-wide plans discussed in CMGs chaired by home authorities, with FDIC participation. - State Insurance: Preparation of resolvability assessments for foreign-owned G-SIIs is generally less advanced than for G-SIBs. State commissioners contribute to the extent they participate in CMGs. - Findings: Resolvability of U.S. operations of foreign G-SIFIs is being incorporated in group-wide resolvability assessments discussions in CMGs. - EC10.3 (authorities’ powers to require changes) - The supervisory or resolution authorities should have the power to require changes to a firm’s business practices, legal, operational or financial structures or organisation necessary to improve resolvability. - Description and findings re EC10.3: - DFA: Resolution authorities’ ability to mandate changes is a cornerstone of effective resolution planning. U.S. FBAs have statutory powers to require adoption of measures to reduce complexity and costliness of resolution. - Pursuant to Section 165(d) of the DFA, the FRB and FDIC must jointly review institutions’ plans for orderly resolution under the U.S. Bankruptcy Code (Title I). If they jointly determine a plan is not credible or would not facilitate orderly resolution, they shall inform the company in writing. Failure to resubmit an acceptable plan within 90 days (subject to extensions) may result in formal actions remaining in force until remedied. Such actions may include imposition of more stringent capital, leverage, or liquidity requirements, or restrictions on growth, activities, or operations of the company (or any subsidiary). - If the company fails to submit an acceptable plan within two years from imposition of measures, the agencies may order the company to divest certain assets or operations to facilitate an orderly resolution. Prior to issuing a notice of deficiencies or a divestiture order likely to have significant impact on a regulated subsidiary or IDI, the FRB must consult with each FSOC member involved in its supervision. - The FRB is authorized to impose additional prudential standards on NBFCs and BHCs with consolidated assets greater than $50 billion. Such standards could include the introduction of a contingent capital requirement; enhanced public disclosures; short-term debt limits; and any other prudential standards the FRB may deem appropriate. Any requirement likely to have significant impact on a regulated subsidiary or IDI warrants prior consultation of each FSOC member involved in supervision. - In the joint press release on findings of the second iteration review of DFA Title I resolution plans for the largest firms (total consolidated assets > $250 billion), the agencies indicated they expect to use the aforementioned authority if identified shortcomings are not addressed in the next iteration. - Banking: Neither the FDI Act nor the IDI Rule provide specific powers to require changes to improve resolvability. The FBA has a wide range of supervisory options when an IDI is not complying with laws, regulations or supervisory orders or is engaged in unsafe or unsound practices, and the FDIC considers the supervisory toolkit could be leveraged to improve IDIs’ resolvability. Under FDIA and other acts, FDIC and other FBAs can impose cease and desist orders, remove board members, impose monetary penalties, facilitate mergers and take prompt corrective action. - State Insurance: Insurance commissioners have statutory power under state laws to require changes to a firm’s business practices or structures to improve resolvability before receivership. Commissioners have broad group-wide supervisory powers to direct/prohibit actions and can require actions regarding operational or financial structure after placing a firm into special administrative supervision. Traditionally, focus is on dialogue and informal influence; after receivership, the commissioner as receiver may make changes depending on prior court approval. - Findings: Agencies have broad powers under the DFA to require changes to business practices, legal, operational and financial structures, or organizations of designated NBCFs and BHCs subject to Title I resolution planning requirements to address impediments to effective resolution. The FDI Act does not provide for specific powers to improve resolvability but provides broad powers to correct unsafe and unsound practices. State law provides powers to make similar changes to insurance firms under certain supervisory powers and in cases of special administrative supervision. ### Assessment of KA10 and recommendations - Comments: - Authorities have made progress preparing resolvability assessments, focusing on U.S.-based G-SIBs given the serious adverse effects their failure could have on U.S. financial stability. - Efforts should be broadened to ensure resolvability assessments are prepared for all institutions whose failure could have serious adverse effects on the U.S. financial system and overall economy. - Resolvability assessments are particularly relevant for complex insurance groups designated by the FSOC for FRB supervision to gauge feasibility of an SPE resolution strategy under the OLA. Through resolvability assessments, authorities can: - (a) enhance awareness of implications of initiating resolution procedures against NBFCs under DFA Title II; - (b) identify factors and conditions that may adversely affect effective implementation of Title II resolution actions; and - (c) help determine specific actions necessary to achieve greater resolvability. - Agencies have broad powers under the DFA to require changes to business practices, legal, operational and financial structures, or organizations of designated NBCFs and BHCs subject to Title I resolution planning requirements to address impediments to effective resolution. The FDI Act does not provide for specific powers to improve resolvability. State law provides powers to make similar changes to insurance firms through supervisory powers and under administrative supervision. *Source: _cr15171 - 10. Resolvability Assessments* ### 11. Recovery and Resolution Planning ### 11. Recovery and Resolution Planning ### Key Attributes and Expectations - Jurisdictions should put in place an on-going process for recovery and resolution planning, covering at a minimum domestically incorporated firms that could be systemically significant or critical if they fail (KA11.1). - Jurisdictions should require robust and credible RRPs, containing the essential elements set out in Annex III, for all G-SIFIs and any other firm that its home authority assesses could have an impact on financial stability in the event of its failure (KA11.2). - RRPs should be informed by resolvability assessments and reflect the firm’s nature, complexity, interconnectedness, substitutability and size (KA11.3). - Senior management of the firm is responsible for providing necessary input to resolution authorities for assessment of recovery plans and for preparation by the resolution authority of resolution plans (KA11.4). - Recovery plans should identify options to restore financial strength and viability and include: - credible options to cope with a range of scenarios including idiosyncratic and market-wide stress; - scenarios that address capital shortfalls and liquidity pressures; - processes to ensure timely implementation of recovery options (KA11.5). - Resolution plans should facilitate effective use of resolution powers to protect systemically important functions and make resolution feasible without severe disruption or exposing taxpayers to loss. They should include a substantive resolution strategy agreed by top officials and an operational plan, and identify in particular (KA11.6): - (i) financial and economic functions for which continuity is critical; - (ii) suitable resolution options to preserve or wind down those functions orderly; - (iii) data requirements on firm’s business operations, structures, and systemically important functions; - (iv) potential barriers to effective resolution and mitigation actions; - (v) actions to protect insured depositors and insurance policy holders and ensure rapid return of segregated client assets; - (vi) clear options or principles for exit from the resolution process. - Firms should ensure key Service Level Agreements can be maintained in crisis and that contracts prevent termination triggered by recovery/resolution and facilitate transfers (KA11.7). - For G-SIFIs the home resolution authority should lead group resolution plans in coordination with the firm’s CMG; host authorities with systemic presence should be given access to RRPs and relevant information (KA11.8–KA11.9). - RRPs should be updated regularly, at least annually or when material changes occur, and subject to regular CMG reviews (KA11.10–KA11.11). - If authorities are not satisfied with a firm’s RRP, they should require appropriate measures and provide for prior consultation on contemplated actions (KA11.2, repeated). ### Essential Criteria and Jurisdictional Implementation (EC11.1–EC11.13) - EC11.1: Resolution regime requires RRPs for all G-SIFIs for which jurisdiction is home country and any other firm that could impact financial stability. - DFA: Section 165(d) requires living wills for NBFCs supervised by the FRB and BHCs with consolidated assets equal or greater than $50 billion, including minimum content: (i) protection of any IDI affiliated with the company from nonbank subsidiary risks; (ii) full descriptions of ownership, assets, liabilities, contractual obligations; (iii) identification of cross-guarantees, major counterparties, collateral pledges; (iv) any other FRB/FDIC joint requirements. - 165(d) Rule prescribes staggered submissions by asset size: largest (total nonbank assets of at least $250 billion) due July 1, 2012; companies with total nonbank assets at least $100 billion but below $250 billion due July 1, 2013; others mandated by December 31, 2013. Two U.S.-based G-SIIs designated for FRB supervision required to submit first living wills by July 1, 2014. - DFA Title II (OLA) provides FDIC ability to resolve systemically important financial institutions to be used when bankruptcy would have serious adverse effects on financial stability; Title II policy goals include minimizing moral hazard, holding management accountable, and coordinating with foreign authorities. FDIC’s Title II plans are not bound by firms’ Title I submissions but may be informed by them. - FDIC published a notice on the SPE strategy in December 2013 (recapitalization at holding company level to keep operating subsidiaries "open"); applicability to U.S.-based G-SIIs (insurance holding companies) is unclear given state insurance holding company laws and separation of assets/liabilities. - FRB/FDIC review of 2013 living wills of eleven banking groups with assets of at least $250 billion highlighted common shortcomings: unrealistic or inadequately supported assumptions and failure to identify/implement structural changes to enhance resolvability. - Agencies expect covered companies to make significant progress addressing shortcomings by 2015 submission and may determine a Title I living will does not meet DFA requirements if shortcomings unaddressed. - Recovery planning requirement for large financial institutions (NBFCs designated by FSOC, LBOs with consolidated assets of at least $50 billion, and large FBOs with combined U.S. operations assets of at least $50 billion) introduced by the FRB via a December 2012 supervisory letter. - EC11.2: Development and maintenance of RRPs for non G-SIFIs should take into account firm-specific circumstances and cross-border cooperation. - DFA/FSOC can determine an NBFC be supervised by FRB and subject to prudential standards considering factors including leverage, off balance-sheet exposures, significant transactions/relationships, interconnectedness, substitutability, complexity, asset size and other risk factors. - For BHCs and IDIs, requirements are based on asset size thresholds (generally $50 billion) and statutes do not provide discretion to apply Title I requirements to smaller firms whose failure could impact financial stability on non-size criteria. - EC11.3: Legal framework imposes responsibility for recovery planning on board and senior management; plans reviewed at least annually or sooner upon material changes. - DFA: Boards responsible for preparation, oversight, and timely implementation of recovery plans; senior management responsible for integrating recovery planning into corporate governance and operations. Expected outcomes include timely recognition/escalation/implementation of remedial actions and notification to Federal Reserve and supervisors. - FRB guidance (September 2014) applies to eight U.S. based G-SIBs; integration into governance and MIS reporting to boards required. - State insurance: no statutory requirements, but ERM and ORSA reporting may be useful inputs. - EC11.4: Recovery plans must include measures addressing capital shortfalls and liquidity pressures; credible recovery options for idiosyncratic and market-wide stress; clear backstops and escalation procedures with quantitative and qualitative triggers. - FRB consolidated supervision framework (December 2012) expects firms to: - maintain documented quantitative and qualitative triggers and remediation escalation; - ensure triggers reflect broad market- and firm-specific stresses across financial, operational, reputational, legal, compliance risks; - integrate recovery planning with resolution planning, capital/liquidity planning, contingency planning; - undertake recovery testing and training exercises considering interconnectivities; - update plans as needed and review at least annually. - G-SIBs expected to determine a range of remedial actions including sale/transfer/disposal of assets, portfolios, legal entities, or business lines; identify impediments and mitigation strategies; stress testing including tail-events. - Recovery plan aspects to address: - (i) Internal Governance (development, approval, update, links to contingency/resolution planning, triggers and escalation); - (ii) Recovery Options (liquidity/capital conservation/restoration, de-risk/de-lever strategies, structural changes); - (iii) Execution Plan (steps, estimated time frames, impediments, mitigation strategies, communications plan); - (iv) Impact Assessment (financial, business, and counterparty/market impacts). - Banking: IDI Rule (FDIC, 2011) prescribes similar IDI plan requirements focused on depositor protection and DIF, including strategies to separate IDI from parent and ensure insured deposit access within one business day. - State insurance: no statutory recovery planning requirements; ORSA/ERM may partially cover aspects. - Findings: consolidated supervisory framework includes recovery planning but granular guidance (September 2014) limited to eight U.S.-based G-SIBs, creating ambiguity for smaller institutions. - EC11.5: Resolution regime sets out content requirements for resolution plans including substantive resolution strategy and operational plan meeting KA11.6 elements; additional insurer-specific requirements per paragraph 9.10 of II-Annex 2. - DFA/165(d) Rule: Title I living wills must include strategic analysis, governance, organizational structure, MIS inventory, analysis of interconnections/interdependencies, overview of supervisory agencies, and three distress scenarios (baseline, adverse, severely adverse). 165(d) Rule precludes reliance on extraordinary government support. - SR letter 12-17 (FRB consolidated supervision) outlines aspects for agency review: strategic analysis, strategy for maintaining/funding material entities and core lines, impediments to resolution, counterparty failure impact, protection of insured depository subsidiaries, foreign operations strategy, integration into governance and MIS. - 2013 Resolution Plan Guidance for first-wave filers required concise strategic narratives, remediation actions for identified obstacles, and discussion of bankruptcy commencement process. - SR letter 14-1 (January 2014) set heightened supervisory expectations for eight U.S.-based G-SIBs on operational resilience capabilities: collateral management, payment/clearing/settlement obligations, entity-level funding analyses, MIS capabilities, and arrangements for shared/outsourced services. - IDI Rule requires IDI plans to include structure, governance, critical services, payment/clearing systems membership, interconnectedness with parent, major counterparties, off-balance-sheet exposures, capital/funding, systemically important functions, MIS, and resolution strategies (separation and sale of deposit franchise or liquidation strategies). FDIC 2015 IDI guidance (December 2014) clarified failure scenario and required at least one separation/sale strategy and one liquidation strategy; identification of critical services and maintenance in resolution. - State insurance: no statutory resolution planning requirements; ERM/ORSA information may be used. - Findings: 165(d) and IDI Rule broadly cover KA11.6 elements; living wills under 165(d) assume bankruptcy resolution not OLA (Title II). Insurance-specific standards underdeveloped. - EC11.6: Home resolution authority process for CMG review and agreement of substantive resolution strategy for G-SIFIs. - FDIC developing Title II resolution strategies and presenting updates at CMG meetings (Q4-2014); bilateral engagements with CMG members occur. Work illustrated by FDIC and Bank of England joint paper on SPE for G-SIBs. - Resolution strategies for FSOC-designated NBFCs are preliminary; inaugural CMG meetings for AIG and Prudential in Q4-2014 did not have comprehensive resolution strategy discussions. - Findings: FDIC developing strategies under Title II; main modalities discussed in CMGs for U.S.-based G-SIBs; preparation for NBFCs less advanced. - EC11.7: Firms required to ensure SLAs preserving continuity of critical functions/shared services in crisis and include non-termination/transfer provisions. - DFA: firms expected to enter robust SLAs and contingency arrangements; FRB supervisory expectations require documented legal/operational frameworks and cost estimates. - Banking: external providers prohibited from terminating or taking control of property or affecting contractual rights of failed institution without FDIC consent during 90-day period commencing on FDIC appointment as receiver. - State Insurance: IRMA Section 108 C prohibits termination of contracts solely because receivership commenced; unclear degree of state adoption. - Findings: firms under DFA 165(d) expected to ensure continuity of critical services; no binding standards for service continuity of FSOC-designated NBFCs beyond supervisory letter for G-SIBs. - EC11.8: Home resolution authority develops group-wide resolution strategy for G-SIFI with CMG coordination and provides CMG access to RRPs. - FDIC committed to lead development of group-wide resolution strategy to be reviewed in CMG. FRB/FDIC have not instituted procedures to proactively share Title I plans but have made information available to CMG members upon request. - For U.S.-based G-SIIs, group-wide resolution strategy process not yet developed; CMG meetings Q4-2014 did not include FDIC group-wide strategy discussions. CMG members have been provided living wills upon request. - Findings: FDIC sharing Title II plan updates with CMG members; development more advanced for G-SIBs than NBFCs; no established process for U.S.-based G-SIIs group-wide strategy. - EC11.9: Home resolution authority cooperates with jurisdictions where G-SIFI has systemic presence that are not CMG members and provides them access to RRP material that would impact their jurisdiction. - Agencies have established colleges and bilateral MOUs. No formal procedures yet for interaction with non-CMG hosts; intend to align engagement with pending FSB guidance. - Findings: agencies intend to realign engagement with non-CMG hosts once FSB guidance finalized. - EC11.10: Host with its own resolution plans coordinates with home authority to ensure consistency with group plan. - U.S. requirement for Title I living wills covers BHCs with consolidated assets equal or greater than $50 billion, including local operations of foreign G-SIFIs. Participation in CMGs allows U.S. agencies to contribute to group-wide plans. - FRB/FDIC have not institutionalized proactive sharing of Title I plans; where available, agencies’ inputs on group strategies are based on Title II strategies which align better with group plans than Title I living wills. - FSOC has not exercised DFA section 113 to designate U.S. operations of a foreign insurance group; would be mandated to do so if FSOC deemed U.S. operations systemically important. - Findings: participation in CMGs allows consistency checks; Title I living wills less suited for full alignment with group plans. - EC11.11: Authorities review and update resolution plans at least annually and sooner upon material change. - 165(d) Rule requires annual filing; provides for agency-requested interim updates and requires covered companies to inform agencies within 45 days of events that could materially affect plan; agencies can request more frequent plans or extend submission dates. - IDI Rule contains annual submissions, FDIC discretion to modify dates, and mandatory reporting of material events; IDI Rule does not explicitly provide authority to request interim updates. - Findings: Title I and IDI plans required annually; material events must be notified within 45 days; FDIC IDI Rule lacks explicit interim update authority. - EC11.12: Process for annual CMG review of resolution strategy by top officials and operational plans by senior officials, involving firm CEO where appropriate. - U.S. authorities utilize CMGs for G-SIBs and G-SIIs to coordinate group-wide strategies and resolvability assessments; Resolvability Assessment Process includes interaction with firms’ senior officials. - For NBFCs, foreign authority engagement is in early stage. - Findings: U.S. authorities engage foreign authorities via CMG as strategies become available. - EC11.13: Authorities have power to require firms to address deficiencies in recovery plans or inputs to resolution plans and, when requiring initial resolution plan, to require remediation. - DFA Section 165(d): FRB and FDIC review Title I plans for credibility; if plan not credible and firm fails to resubmit credible plan, agencies may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations until plan remedied. Failure to resubmit an acceptable plan within two years may result in instruction to divest assets/operations (in consultation with FSOC). - Concept of “credibility” not defined in DFA or 165(d) Rule, providing agencies broad discretion. - IDI Rule: FDIC reviews IDI plans for credibility; if incomplete FDIC informs IDI in writing and IDI must resubmit within 30 days; substantive review may request revised plan within 90 days; IDI Rule does not explicitly identify consequences of failure to correct deficiencies. - Findings: DFA gives FRB/FDIC explicit powers including far-reaching measures to address plan deficiencies; IDI Rule silent on remedial actions beyond general FDIA enforcement powers. ### Major Findings, Gaps, and Policy Recommendations - Findings summary: - The U.S. framework establishes living will and resolution planning requirements for BHCs and NBFCs supervised by FRB and IDIs with $50 billion or more in assets, targeting rapid and orderly resolution under U.S. Bankruptcy Code (Title I) and developing Title II (OLA) capabilities. - The framework broadly aligns with FSB Key Attributes, though insurance-specific recovery and resolution standards remain underdeveloped. - Granular supervisory guidance (e.g., September 2014 and SR 14-1) is explicitly limited to the eight U.S.-based G-SIBs, creating ambiguity for smaller but potentially systemically relevant firms. - FDIC Title II strategies and coordination via CMGs are more advanced for G-SIBs than for FSOC-designated NBFCs; for U.S.-based G-SIIs a process for group-wide resolution strategies is not yet established. - Agencies have broad discretionary powers under DFA to require remedial measures when plans lack credibility; IDI Rule has less explicit remedial authority. - Policy recommendations and considerations from findings: - Develop insurance-specific recovery and resolution standards leveraging FSB guidance (including Appendix II, Annex 2 of the Key Attributes and draft guidance on critical functions/shared services). - Ensure thorough reviews of all covered companies’ submissions, focus on remediation of previously identified shortcomings, and enforce ongoing supervisory measures to gauge firms’ preparedness. - Consider providing agencies with legal authority to require recovery and resolution plans from banks that do not meet the numeric $50 billion asset threshold but which could pose systemic risks based on interconnectedness, substitutability, and complexity. - Continue FDIC efforts to ensure preparedness for resolutions under the FDI Act in addition to OLA (a "belt-and-braces" approach), given potential OLA deployment limits and SPE implementation challenges. - Institutionalize procedures for proactive information sharing with CMG members and non-CMG host authorities in line with finalized FSB guidance to improve cross-border coordination. *Source: _cr15171 - 11. Recovery and Resolution Planning* ### 12. Access to Information and Information Sharing ### 12. Access to Information and Information Sharing ### Key attributes and expectations (KA12) - Jurisdictions should ensure that no legal, regulatory or policy impediments exist that hinder the appropriate exchange of information, including firm-specific information, between supervisory authorities, central banks, resolution authorities, finance ministries and the public authorities responsible for guarantee schemes. In particular: - (i) the sharing of all information relevant for recovery and resolution planning and for resolution should be possible in normal times and during a crisis at a domestic and a cross-border level; - (ii) the procedures for the sharing of information relating to G-SIFIs should be set out in institution-specific cooperation agreements (see Annex I); and - (iii) where appropriate and necessary to respect the sensitive nature of information, information sharing may be restricted, but should be possible among the top officials of the relevant home and host authorities. - Jurisdictions should require firms to maintain Management Information Systems (MIS) that are able to produce information on a timely basis, both in normal times for recovery and resolution planning and in resolution. Information should be available at the group level and the legal entity level (taking into account information needs under different resolution scenarios, including the separation of individual entities from the group). Firms should be required, in particular, to: - (i) maintain a detailed inventory, including a description and the location of the key MIS used in their material legal entities, mapped to their core services and critical functions; - (ii) identify and address exogenous legal constraints on the exchange of management information among the constituent entities of a financial group (for example, as regards the information flow from individual entities of the group to the parent); - (iii) demonstrate, as part of the recovery and resolution planning process, that they are able to produce the essential information needed to implement such plans within a short period of time (for example, 24 hours); and - (iv) maintain specific information at a legal entity level, including, for example, information on intra-group guarantees and intra-group trades booked on a back-to-back basis. ### Essential criterion EC12.1 - The resolution authority has the power under the legal framework to access any information from firms that is material for the planning, preparation and implementation of resolution measures in a timely manner. ### Description and findings re EC12.1 - DFA. The FDIC has access to information that is material for the planning, preparation and implementation of resolution measures through its review, conducted jointly with the FRB, of plans submitted pursuant to Section 165(d)(1) of the DFA by NBFCs that could pose a threat to the financial stability of the U.S., as determined by the FSOC, and bank holding companies with $50 billion or more in total consolidated assets. These plans are required to provide a broad range of information relevant to resolution planning and implementation including, for example, detailed descriptions of organizational structures, credit exposures and cross-guarantees, as well as supporting data. - Once the FDIC has been appointed as receiver for a covered financial company, other federal regulators shall make available all records relating to such company. (DFA Section 210(i).) - The FDIC may also exercise its special examination authority with respect to any NBFC supervised by the FRB or BHC with total consolidated assets equal to or greater than $50 billion for the purpose of implementing the FDIC’s authority under Title II of the DFA, provided that the FDIC must coordinate any such special examination to the maximum extent practicable with the FRB and that such special examination authority may not be used with respect to any such NBFC or BHC that is in a generally sound condition. - Banking. As a general matter, the FDIC has access to firms’ information in connection with its responsibility to conduct on-site examinations of IDIs and its authority to take enforcement actions against IDIs, bank holding companies, and affiliates thereof under statutorily prescribed conditions. - The FDIC also has special examination authority with respect to any IDI and it may exercise it whenever it determines that this is necessary to gauge the condition of such IDI for insurance purposes. In connection with the exercise of this special examination authority, the FDIC has the authority to examine the affairs of any affiliate of any IDI as may be necessary to disclose fully (i) the relationship between any such IDI and any such affiliate; and (ii) the effect of such relationship on the IDI. - The FDIC can also have access to firms’ information through its review of plans submitted by IDIs with $50 billion or more in total assets. - State Insurance. Under state insurance holding company legislation, the commissioner as state regulator has access to the books, records and other information held by the insurer and its affiliates that may be utilized for establishing a crisis management plan. - Under the IHCA, the commissioner as a regulator has the power to examine an insurer and its affiliates to ascertain the financial condition, including enterprise risk, of each of the insurer group companies and the insurer group as a whole. The commissioner may order any registered insurer to produce such records, books and other information papers in the possession of the insurer or its affiliates as are reasonably necessary to determine compliance with relevant regulations. The commissioner has the power to initiate the establishment of, or participate in, a supervisory college in order to determine compliance by the insurer subject to supervision. - Findings. The FDIC has strong powers to access information that is material for the planning, preparation and implementation of resolution measures in a timely manner and through several legal avenues. When the FDIC does not have direct access to such information, it has in place robust information sharing mechanisms with the relevant federal regulatory agencies. *Source: _cr15171 - 12. Access to Information and Information Sharing* ### conclusions apply with respect to the information gathering powers of commissioners under ### _cr15171 - conclusions apply with respect to the information gathering powers of commissioners under ### EC12.2 — Legal gateways for disclosure of non-public information - The legal framework permits and contains adequate legal gateways for the disclosure, in normal times and during a crisis, of non-public information (including firm-specific information) necessary for recovery and resolution planning and for carrying out resolution to domestic and foreign authorities that could have a role in resolution, including as appropriate supervisory authorities, central banks, resolution authorities, finance ministries and the public authorities responsible for guarantee schemes. - Disclosure under those legal gateways is conditional on the recipient authority being subject to adequate confidentiality requirements and safeguards that are appropriate to the nature and sensitivity of the information to be disclosed. - DFA and Banking: - FBAs are authorized, at their discretion, to furnish any report of examination or other confidential supervisory information concerning any IDI or other entity examined by such agency to any other federal or state agency or authority with supervisory or regulatory authority over the IDI or other entity, and to any other person that the FBA determines to be appropriate. - Five supervisory agencies (the Federal Financial Institutions Examination Council members), the SEC, the Federal Trade Commission, the CFTC and the CFPB are authorized to exchange financial records, examination reports and other information with respect to a financial institution, holding company or any subsidiary of an IDI or holding company. 12 USC. § 3412(e). - FBAs have statutory authority to disclose information obtained in the course of exercising their supervisory or examination authority to any foreign bank regulatory or supervisory authority, provided that the disclosure is appropriate and does not prejudice the interests of the U.S. 12 USC. § 3109(a). - FDIC, as receiver for an IDI and for the purposes of carrying out its powers, may provide assistance to any foreign banking authority. FDI Act, 12 USC. § 1818(v) and 1821 (r). - FBAs have promulgated regulations governing the disclosure of non-public information. 12 C.F.R. Part 4 (OCC); 12 C.F.R § 211.27 and 12 C.F.R. Part 261 (Federal Reserve Board); 12 C.F.R. § 309.6 and 12 C.F.R. § 347.207 (FDIC); and 12 C.F.R. Part 1070 (CFPB). - Memoranda of understanding, statements of cooperation and other arrangements exist to establish frameworks for cooperation and the exchange of information with foreign authorities; FBAs may share relevant supervisory information with foreign authorities even in the absence of a formal arrangement. - State Insurance: - State insurance holding company legislation generally provides the state commissioner with broad authority to share, in normal times and in a crisis, non-public information necessary for recovery and resolution planning and for carrying out resolution, to relevant domestic and foreign authorities as well as ancillary supervisory authorities. - Example: Section 8 C (1) of IHCA authorizes the commissioner to share documents, materials or other information including confidential and privileged documents with other state, federal and international regulatory agencies, with NAIC and its affiliates and subsidiaries, and with state, federal, and international law enforcement authorities (including members of supervisory colleges), provided that the recipient agrees in writing to maintain confidentiality and has verified in writing the legal authority to maintain confidentiality. - Findings: - The U.S. regime contains adequate legal gateways for disclosure of non-public information for recovery and resolution planning and for carrying out resolution to domestic and foreign authorities. - Statutory interpretation by U.S. authorities allows possible disclosure of resolution-related information under the existing legal framework and is reinforced by practice of sharing information with foreign resolution authorities, subject to safeguards and confidentiality requirements. - Similar conclusions apply with respect to the state insurance resolution regime. - Recommendation: - For clarity, consideration may be given to updating the relevant statutes so as to explicitly mention the sharing of resolution-related information. ### EC12.3 — Safeguards to protect confidentiality of non-public information received from other authorities - Safeguard requirements described: - (i) require authorities to keep such information confidential and to use it only in accordance with the terms on which the information was provided; - (ii) prohibit domestic authorities from disclosing such information to other domestic or foreign authorities or other third parties without the prior express consent of the authority that provided it, unless such disclosure is compelled by law; and - (iii) exclude information received from foreign authorities from mandatory disclosure pursuant to freedom of information or similar legislation, or treat such information as falling under an exemption. - DFA and Banking: - FBAs are prohibited from disclosing certain types of confidential financial information unless such sharing is specifically authorized by law. 18 USC. § 1905. - FBAs’ regulations set forth confidentiality requirements and may deny demands for non-public information except where legally compelled (e.g., subpoena or court order). - When a FBA is compelled to disclose non-public information received from another authority, it will notify the providing authority and make reasonable efforts to resist disclosure when feasible. - Sharing information between federal agencies that is deemed privileged shall not be deemed a waiver of any privilege. FDI Act, 12 U.S.C. § 1821(t). - An FBA that obtains protected or confidential information from another FBA may not share that information with another regulatory authority without first obtaining prior written permission from the FBA that provided the information. 12 CFR § 261.20(g), 12 CFR § 4.36(d) and 4.37(c) and (d). - Under the IBA, non-public information provided by a foreign authority to a FBA will have broad protection from compelled onward disclosure where certain conditions are met, e.g., obtained pursuant to a memorandum of understanding and a written representation that public disclosure would violate the foreign law. 12 USC. § 3109(c)(1). - Statutory protection constitutes a statute within the meaning of the Freedom of Information Act. 5 USC. § 552(b)(3). - Even absent IBA protections, FOIA exemptions may apply: protection for “trade secrets and commercial or financial information obtained from a person [that is] privileged and confidential” and protection for examination, operating, or condition reports prepared for regulatory agencies. (U.S. Department of Justice Guide to FOIA cited). - State Insurance: - State insurance holding company legislation establishes broad safeguards to protect confidentiality of non-public information received from other domestic or foreign authorities. - Example: Section 8A of IHCA designates documents/materials received from other authorities in connection with group-wide supervision as confidential by law and privileged, excluding such information from FOI, subpoena or discovery and from admission in evidence in private civil action. - Commissioner may share confidential and privileged information with other states, federal and international regulatory agencies, with NAIC and affiliates, and with law enforcement if recipients agree in writing to maintain confidentiality and have verified legal authority to do so. - Commissioner may receive confidential and privileged information from NAIC and other jurisdictions provided that such information must be maintained as confidential or privileged. IHCA Section 8C(3). - Findings: - The U.S. legal framework contains adequate safeguards to protect the confidentiality of non-public information received from other domestic or foreign authorities. ### EC12.4 — Internal policies and procedures to control dissemination of foreign-origin non-public information - DFA and Banking: - FDIC policy: use non-public information received from foreign authorities only in accordance with the terms on which it was provided. - FDIC internal rules delegate authority to establish policies and procedures to heads of relevant divisions (e.g., director of RMS Division and Division of Resolutions & Receiverships). - Policies/procedures include making non-public information available to relevant staff on a need-to-know basis; limiting access via secure computer software platforms; authorized-official access controls; routine monitoring of access. - Physical copies: use designated rooms and storage facilities with restricted access to authorized staff. - State Insurance: - Policies and procedures regulate treatment of sensitive information from foreign authorities. - Commissioner’s employees are subject to state law prohibitions on divulgement of confidential information obtained in performance of duties. - NAIC-sponsored Master Information-Sharing and Confidentiality Agreement (MISCA) sets standards for confidentiality and control of internal dissemination of confidential information received from a foreign authority. - Findings: - The FDIC and state authorities have policies and procedures in place to control and monitor dissemination within the authority of non-public information received from a foreign home or host authority. ### EC12.5 — Firms’ management information systems (MIS) requirements for recovery and resolution planning - General requirement: - Firms subject to recovery and resolution planning requirement are required to maintain MIS capable of producing information necessary for recovery and resolution planning, assessing resolvability and the conduct of resolution, including items specified in KA 12.2, and delivering that information to the authorities on a timely basis. - DFA / FRB expectations and guidance: - Firms are expected to ensure recovery planning capabilities are integrated into corporate governance and supported by robust MIS (see EC11.4). - FRB issued guidance on capabilities firms should have to support recovery or resolution preparedness. - Minimum expected capabilities: (i) effective processes for managing, identifying, and valuing collateral received from and posted to external parties and affiliates; (ii) comprehensive understanding of obligations and exposures associated with payment, clearing, and settlement activities; (iii) ability to analyze funding sources, uses, and risks of each material entity and critical operation, including stress impacts; (iv) demonstrated MIS capabilities for producing certain key data on a legal entity basis that is readily retrievable and controls for data integrity and reliability; (v) robust arrangements for continued provision of shared or outsourced services needed to maintain critical operations, documented and supported by legal and operational frameworks. - Principles and Practices for Recovery and Resolution Preparedness (FRB, January 2014) specify G-SIBs should be able to timely produce: (i) monthly financial statements for each material entity; (at least monthly); (ii) external and intragroup credit exposures (on- and off-balance sheet, by type of exposure, counterparty, maturity, and gross payable and receivable); (iii) gross and net risk positions with internal and external counterparties; (iv) guarantees, cross holdings, financial commitments and other transactions between material entities; data to facilitate third-party valuation of assets and businesses, including risk metrics; key third party contracts, including the provider, provider's location, service(s) provided, legal entities that are a party to or a beneficiary of the contract, and key contractual rights (for example, termination and change in control clauses); (v) legal agreement information, including parties to the agreement and key terms and interdependencies (for example, change in control, collateralization, governing law, termination events, guarantees, and cross-default provisions); (vi) service level agreements between affiliates, including the service(s) provided, the legal entity providing the service, legal entities receiving the service, and any termination/transferability provisions; (vii) licenses and memberships to all exchanges and value transfer networks, including FMUs; key management and support personnel, including dual hatted employees, and any associated retention agreements; (viii) agreements and other legal documents related to property, including facilities, technology systems, software, and intellectual property rights; (ix) updated legal records for domestic and foreign entities, including entity type and purpose (for example, holding company, bank, broker-dealer, and service entity), jurisdiction(s), ownership, and regulator(s). - Observance of guidance is tested as part of ongoing supervisory activities. - FRB launched in 2014 a comprehensive review of recovery and resolution preparedness of the eight U.S.-based G-SIBs, covering MIS capabilities. - Banking / FDIC IDI Rule: - Covered IDIs must include in their plans a detailed inventory and description of key MIS and applications for risk management, accounting, and financial and regulatory reporting, identifying legal owner/licensor, use/functions, listing service level agreements, software and systems licenses, and describing capabilities to collect, maintain, and report information to senior management and, upon request, the FDIC. 12 CFR § 360.10 (c)(2)(xix). - Firms required to provide mapping of critical services (which may include MIS) to material entities and core business units. - FDIC public guidance (December 2014) calls out five significant obstacles to an orderly and least costly resolution identified during FDIC internal resolution plan reviews; loss of access to relevant data, MIS and IT resulting in inability to generate timely and accurate reporting is one of the five and must be discussed with mitigation actions and timelines. - State Insurance: - No particular provisions in state law require insurance companies to maintain MIS specifically for recovery and resolution planning. - NAIC model legislation provisions exist for production of certain information on financial conditions, but no specific focus on recovery and resolution planning. - Sound information systems for board reporting and high-level risk committees and risk officers in each entity/line of business are widely recognized standards. - Findings: - Firms subject to resolution planning are required to demonstrate MIS capabilities for producing, on a legal entity basis, data relevant for recovery and resolution planning, assessing resolvability and conducting resolution. - State insurance resolution regimes do not have provisions requiring maintenance of MIS for recovery and resolution planning purposes. ### EC12.6 — Processes to test firms’ capability to produce information for recovery/resolution - DFA / Supervisory framework: - Authorities have an array of tools and techniques to carry out supervisory responsibilities for banking, including mandated on-site and off-site reviews, uniform rating process, planning processes, stress testing and horizontal reviews. - FBAs have implemented an enterprise-wide supervisory approach evaluating effectiveness of policies, procedures, controls, MIS and risk management across organizations, including cross-border operations. - On-site examinations generally annual and coordinated among FBAs and state supervisors; examinations assess MIS and risk management processes. - Off-site supervision monitors regulatory reports, internal and external auditor reports which may relate to MIS capabilities. - Banking: - IDIs generally subject to full-scope, on-site examination on an annual basis. FDI Act 12 USC. § 1820 (d) with caveat on extension to once every 18 months for smaller institutions (total assets of less than US$500 million) that meet certain criteria. - IDI Rule prescribes covered IDIs provide the FDIC with all information the FDIC deems necessary to assess resolution plan credibility and the covered IDI’s ability to implement the plan. - Covered IDIs required to demonstrate capability to promptly produce information and data underpinning the resolution plan in a timeframe and format acceptable to the FDIC. 12 CFR § 360.10(d). - FDI Act provides authority for FDIC to conduct special examinations when Board determines necessary. - State Insurance: - No explicit provisions in state law requiring procedures for testing firms’ ability to timely produce information relevant for recovery and resolution planning; state commissioners can undertake on-site inspections at any time and request financial condition information, but absence of specific recovery/resolution testing limits clarity on meaningfulness. - Findings: - Firms’ capabilities to promptly produce information necessary for recovery and resolution planning and in resolution scenarios are periodically tested via recurrent supervisory activities. ### Assessment of KA12 and related comments - Comments: - The U.S. bank and insurance resolution regimes provide for adequate powers enabling the authorities to have access and to share information that is material for the planning, preparation and implementation of resolution measures. - Recommended Actions (summary excerpt relevant to KA12): - KA12: None *International Monetary Fund — content as provided in the source PDF.* ### Appendix I. Resolution Legislation Applicable to Different Financial Firms ### Appendix I. Resolution Legislation Applicable to Different Financial Firms ### Holding companies & group entities (If Title II systemic risk determination made) - Large bank holding companies (BHCs) - Type/sub-type: Large bank holding companies (BHCs) - Primary regulator: Federal Reserve - Resolution authority: Court appointed trustee - Resolution funds: None - Resolution legislation: Chapter 7 or 11 of the bankruptcy code - Resolution authority for bridge/alternative: FDIC - Resolution funding for bridge/alternative: OLF - Resolution legislation for bridge/alternative: DFA - Financial holding companies (FHCs) which meet enhanced regulatory standards - (Same structure as Large BHCs above) - Savings & loans holding companies (SLHCs) which meet enhanced regulatory standards - (Same structure as Large BHCs above) - Intermediate Holding Companies (IHC) - (Same structure as Large BHCs above) - Nonbank subsidiaries of large BHCs, FHCs, SLHCs, IHCs - Non-insurance/non broker-dealer, regulated subsidiaries - Primary regulator: Federal Reserve or functional regulator - Resolution authority: Court appointed trustee - Resolution funds: None - Resolution legislation: Chapter 7 or 11 of bankruptcy code - Resolution authority for bridge/alternative: FDIC3 - Resolution funding for bridge/alternative: OLF - Resolution legislation for bridge/alternative: DFA - Non-regulated subsidiaries - Primary regulator: None - Resolution authority: Court appointed trustee - Resolution funds: None - Resolution legislation: Chapter 7 or 11 of bankruptcy code - Resolution authority for bridge/alternative: FDIC3 - Resolution funding for bridge/alternative: OLF - Resolution legislation for bridge/alternative: DFA - Insurance company subsidiaries - Primary regulator: State regulator - Resolution authority: State resolution authority - Resolution funds: State guaranty association - Resolution legislation: State legislation - Resolution authority for bridge/alternative: State regulator or FDIC4 - Resolution funding for bridge/alternative: State guaranty association - Resolution legislation for bridge/alternative: State legislation - Broker dealer subsidiaries - Primary regulator: SEC - Resolution authority: Court appointed trustee - Resolution funds: SIPC - Resolution legislation: SIPA - Resolution authority for bridge/alternative: FDIC3/SIPC5 - Resolution funding for bridge/alternative: SIPC/OLF6 - Resolution legislation for bridge/alternative: SIPA/DFA7 Notes (as provided in source) - 1 FBOs with non-branch/ non-agency US assets of $50billion or above are required to establish a US based IHCs by 1 July 2016, as the US parent of all their US bank and non-bank subsidiaries (e.g., broker-dealers, finance companies, and special purposes entities) but not branch assets and liabilities. - 2 Nonbank subsidiaries engaged in securities, commodities or insurance activities are supervised by their functional regulators e.g., broker-dealer, investment adviser, investment company regulated by the SEC; an insurance company or insurance agent subject to supervision by a state regulator; and a nonbank subsidiary engaged in CFTC regulated activities. - 3 For subsidiaries deemed “covered subsidiaries” or “covered broker-dealers” including those predominantly engaged in activities that are financial in nature or incidental thereto. - 4 Title II of the DFA provides that a systemically important insurance company (as opposed to the parent company of the insurance company) is to be resolved pursuant to state law. If the appropriate state authority does not commence the resolution of the insurance company within 60 days of a systemic risk determination by the Treasury Secretary, then the FDIC shall have the authority to stand in the place of the appropriate regulatory agency and file the appropriate judicial action in the appropriate state court to place such company into orderly liquidation under the laws and requirements of the state (not the OLA powers). - 5 The SIPC acts as trustee for the covered broker or dealer in the Title II resolution of covered broker-dealers. - 6 Under Sec. 205 (e) (2) of the DFA, SIPC satisfies customers’ claims in the manner and amount provided under SIPA. FDIC satisfies customers’ claims to the extent that a customer would have received more securities or cash with respect to the allocation of customer property had the covered financial company been subject to a proceeding under SIPA. - 7 Except as otherwise provided in Section 205 of DFA, SIPA administers the determination of claims and the liquidation of assets retained in the receivership of the covered broker or dealer and not transferred to a bridge financial company. ### Non-bank SIFIs designated by FSOC under Title I of the DFA (Sec.113) - FSOC designated non-banks SIFIs that are not insurance companies - Primary regulator: Federal Reserve - Resolution authority: Court appointed trustee - Resolution funds: None - Resolution legislation: Chapter 7 or 11 of bankruptcy code - Resolution authority for bridge/alternative: FDIC - Resolution funding for bridge/alternative: OLF - Resolution legislation for bridge/alternative: DFA - FSOC designated SIFIs that are insurance companies - Primary regulator: State resolution - Resolution authority: State guaranty association - Resolution funds: State guaranty association - Resolution legislation: State legislation - Resolution authority for bridge/alternative: State regulator or FDIC4 - Resolution funding for bridge/alternative: State guaranty association - Resolution legislation for bridge/alternative: State legislation - Insurance companies not designated as SIFIs under Title I (Sec.113) - Primary regulator: State regulator - Resolution authority: State resolution authority - Resolution funds: State guaranty association - Resolution legislation: State legislation - Resolution authority for bridge/alternative: State regulator or FDIC4 - Resolution funding for bridge/alternative: State guaranty association - Resolution legislation for bridge/alternative: State legislation - Broker dealers not designated as SIFIs under Title I (Sec.113) - Primary regulator: SEC - Resolution authority: Court appointed trustee - Resolution funds: SIPC - Resolution legislation: SIPA - Resolution authority for bridge/alternative: FDIC3/SIPC5 - Resolution funding for bridge/alternative: SIPC/OLF6 - Resolution legislation for bridge/alternative: SIPA/DFA7 Notes (as provided in source) - 8 The FSOC has designated four nonbank financial companies—AIG, General Electric Capital Corporation, Metlife and Prudential Financial, Inc.—and eight financial market utilities (FMUs) to date. ### Deposit-takers - National banks - Primary regulator: OCC - Resolution authority: FDIC - Resolution funds: DIF - Resolution legislation: FDIA - State banks - If Member Federal Reserve - Primary regulator: Federal Reserve - Resolution authority: Federal Reserve - If Nonmember Federal Reserve - Primary regulator: FDIC - Resolution authority: FDIC - Savings and loan associations - If State-licensed - Primary regulator: FDIC - Resolution authority: FDIC - If Federally licensed - Primary regulator: OCC - Resolution authority: OCC - Subsidiaries, branches & agencies of foreign bank organizations (FBOs) without FDIC coverage - If State-licensed - Primary regulator: Federal reserve or state regulator9 - Resolution authority: State resolution authority or OCC appointed receiver10 - Resolution funds: None - Resolution legislation: State legislation or International Banking Act - If Federally licensed - Primary regulator: OCC - Resolution authority: OCC appointed receiver - Resolution funds: None - Resolution legislation: International Banking Act of 1978 - FBOs with grandfathered FDIC coverage11 - If State-licensed - Primary regulator: FDIC - Resolution authority: FDIC - Resolution funds: DIF - Resolution legislation: FDIA - If Federally licensed - Primary regulator: OCC - Resolution authority: OCC - Credit unions - If State-licensed - Primary regulator: State regulator - Resolution authority: NCUA - Resolution funds: NCUSIF12 - Resolution legislation: FCUA - If Federally licensed or state licensed which elect for a Federal regulator - Primary regulator: NCUA - Resolution authority: NCUA Notes (as provided in source) - 9 On a joint or alternate (i.e. rotating) basis. - 10 Where a FBO has one or more state licensed branches and one or more federally licensed branches, and the OCC appoints a receiver for the Federal branch or agency, the receiver shall take possession of all the property and assets of such FBO in the United States, not only the property and assets of the Federal branch. See 12 U.S.C. § 3102(j). - 11 As of December 19, 1991, FBOs may not establish insured branches in the United States. However, insured branches operating as of that date were permitted to continue operating. There are currently ten insured branches in the United States. - 12 Unless opted out of NCUSIF scheme. *Appendix I. Resolution Legislation Applicable to Different Financial Firms — UNITED STATES (source document).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15171.pdf_