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The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

April 14, 2016 - 9:05 A.M.

The meeting of the FDIC Systemic Resolution Advisory

Committee ("Committee") was called to order by Martin J.

Gruenberg, Chairman of the Board of Directors, Federal Deposit

Insurance Corporation ("FDIC").

The members of the Committee present at the meeting were:

Anat R. Admati, George G.C. Parker Professor of Finance and

.Economics, Graduate School of Business, Stanford University;

Charles A. Bowsher, Former Comptroller General of the United

States; Michael Bradfield, Former General Counsel, FDIC and

Board of Governors of the Federal Reserve System; H. Rodgin

Cohen, Senior Chairman, Sullivan & Cromwell, LLP; William H.

Donaldson, Former Chairman, U.S. Securities and Exchange

Commission; Peter R. Fisher, Senior Fellow, Center for Global

Business and Government at the Tuck School of Business at

Dartmouth University; Richard J. Herring, Co-Director, The

Wharton Financial Institutions Center and Professor of Finance,

The Wharton School, University of Pennsylvania; Thomas H.

Jackson, Distinguished University Professor and President

Emeritus, Simon Graduate School of Business, University of

Rochester; Simon Johnson, Ronald A. Kurtz Professor of

Entrepreneurship, Massachusetts Institute of Technology, Sloan

School of Management; Donald Kohn, Former Vice Chairman, Board

of Governors of the Federal Reserve System and Senior Fellow,

Economic Studies Program, Brookings Institution; Douglas L.

Peterson, President and Chief Executive Officer, McGraw Hill

Financial; and John S. Reed, Former Chairman and CEO of

Citigroup and Former Chairman, Corporation of Massachusetts

Institute of Technology.
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Members Michael C. Bodson, President and Chief Executive

Officer, The Depository Trust and Clearing Corporation, New

York, New York; Janine M. Guillot, Former Chief Operating

Investment Officer, CalPERS, Sacramento, California; Gary H.

Stern, Chairman of the Board of Directors, National Council on

Economic Education, New York, New York; and David J. Wright,

Secretary-General, International Organization of Securities

Commissions, were absent from the meeting.

Members of the FDIC's Board of Directors present at the

meeting were: Martin J. Gruenberg, Chairman, and Thomas J.

Curry, Director (Comptroller of the Currency).

FDIC staff who attended the meeting included: Alexandra S.

Barrage, Kent R. Bergey, Rebecca Bittle, Pauline E. Calande,

Carol Carnes, James A. Caton, Jason C. Cave,

Patricia A. Colohan, Kymberly K. Copa, Carolyn D. Curran,

Christine M. Davis, Ricardo R. Delfin, Patricia B. Devoti,

Doreen R. Eberley, Diane Ellis, Ralph E. Frable, Shannon N.

Greco, Lawrence Gross, Barbara Hagenbaugh, Herbert J. Held,

Bruce W. Hickey, Brent D. Hoyer, Krista Hughes, Nicholas

Kazmerski, Sally Kearney, Rose Kushmeider, Helene Lilly,

Alexandria T. Luk, Christopher Lucas, Arthur J. Murton,

Richard J. Osterman, Jr., Lori J. Quigley, Barbara A. Ryan,

Titus Simmons, R. Penfield Starke, Marc Steckel, Nathan C.

Steinwald, Maureen E. Sweeney, F. Angus Tarpley III, Ryan P.

Tetrick, David Wall, James C. Watkins, Angela Wu, and Charles

Yi.

William A. Rowe, III, Deputy to the Chief of Staff and

Liaison to the FDIC, Office of the Comptroller of the Currency,

was also present at the meeting.

Chairman Gruenberg opened and presided at the meeting. He

began by welcoming the Committee members and noting that the

FDIC's work on the "living will" authority under Title I of the

Dodd-Frank Wall Street Reform and Consumer Protection Act

("Dodd-Frank Act"), as well as the orderly liquidation authority

under Title II of the Dodd-Frank Act, has been quite exceptional

in moving forward on this broad issue and the resolution of a

systemically important financial institution ("SIFI").

Chairman Gruenberg then provided an overview of the meeting

agenda, noting that the morning session would begin with a

presentation on the results of the review of the Title I

resolution plans announced on April 13, 2016, by the FDIC and

Board of Governors of the Federal Reserve System ("Federal

April 14, 2016
112

Reserve"), including a discussion of the process by which the

outcomes were determined; that the next presentation would focus

on the FDIC's work relating to the orderly liquidation authority

under Title II of the Dodd-Frank Act, including a discussion of

some of the internal operational exercises used to develop

increased capability for the FDIC to execute its authorities

under Title II and the important cross-border work underway with

key foreign jurisdictions on resolution planning; and that the

afternoon session would focus on a discussion of developments in

the European Union (~EU") toward a single resolution mechanism,

with Elke Kbnig, Chair of the Single Resolution Board (~SRB"),

European Banking Union, as a guest speaker to outline the SRB's

recent efforts. Chairman Gruenberg then introduced Arthur J.

Murton, Director, Office of Complex Financial Institutions

(~OCFI"), to begin the first panel presentation.

Mr. Murton advised that the first panel would focus on the

findings with respect to the Title I resolution plans that the

FDIC and the Federal Reserve recently released. He then

introduced the panel members: Brent D. Hoyer, Deputy Director,

Complex Financial Institutions, Division of Risk Management

Supervision (~RMS"); Ricardo R. Delfin, Deputy Director,

Resolution Policy Branch, OCFI; and David N. Wall, Assistant

General Counsel, Complex Financial Institutions Section, Legal

Division.

Before turning the discussion over to the panel, Mr. Murton

briefly summarized the framework under Section 165(d) of Title I

of the Dodd-Frank Act, noting that firms must submit plans for

their rapid and orderly resolution under the U.S. Bankruptcy

Code; that the FDIC and the Federal Reserve have the joint

authority to determine whether a firm's plan was not credible or

would not facilitate an orderly resolution under the U.S.

Bankruptcy Code; that, if both agencies make such a

determination, a Notice of Deficiencies would be issued to the

firm indicating the weaknesses of the plan and providing an

opportunity for the firm to respond; that, if the firm's

response was determined to be inadequate, the agencies may

jointly determine that further actions are necessary, such as

higher capital and liquidity requirements or restrictions on

operations, activities, or growth; and that, if those measures

proved to be inadequate after two years, the agencies could

jointly impose additional requirements, such as divestiture of

assets or operations. He explained that the FDIC and the

Federal Reserve issued a joint rule in 2011 concerning the

resolution plan requirements; that the firms submitted their

first resolution plans in 2012; that the agencies jointly

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released public guidance to the firms in 2013, which identified

five obstacles to orderly resolution under the u.s. Bankruptcy

Code-capital and liquidity, global cooperation, counterparty

actions, continuity of operations, and multiple competing

insolvencies-to be addressed in the firms' next submissions; and

that, in August 2014, the agencies released the findings from

their review of the 2013 submissions, which indicated that the

firms' attempts to address those obstacles relied on unrealistic

assumptions and that the firms failed to make or identify

changes that would facilitate an orderly resolution under the

u.s. Bankruptcy Code. He noted that letters to the firms in

August 2014 highlighted five different action areas in which the

firms needed to make demonstrable progress in their next plans,

including: (1) legal entity rationalization and alignment of

legal entities with business lines; (2) a holding company

structure that would facilitate resolution; (3) amendment of

financial contracts to avoid early termination; (4) continuation

of shared services that provide support-critical operations; and

(5) information systems that would facilitate resolution. He

also noted that the agencies requested improvements in the

information provided in the public portion of the firms' plans;

and that it was communicated to all of the firms that the

agencies were willing to actively engage with the firms in the

resolution plan process.

Noting that the Committee's last meeting included a

presentation by Mr. Herring on current research focused on

improving the transparency of the resolution plans, Mr. Murton

asked Mr. Herring to offer his observations on the public

portion of the firms' most recent plans. Mr. Herring noted that

the public sections of the resolution plans submitted in July

2015 were dramatically better in some respects; that many of the

submissions provided substantially more information, with

substantive and responsive disclosures that offered a good sense

of the resolution strategy and organizational structure; and

that the disclosures were lacking some details that would enable

the public to determine how particular institutions have

progressed over time and compared relative to each other.

Noting that, overall, enormous gains have been made by the

agencies and the firms toward improving the transparency of the

process, he emphasized that it was still difficult to sort out

the available data to determine the firms' progress on the plans

in the absence of a standardized quantitative measure; and that

some standardized definitions, such as a definition of ~material

entity," could add clarity in the process. Mr. Murton added

that the u.s. Government Accountability Office had recently

released a report on the process and framework being used by the

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FDIC and the Federal Reserve for the resolution plans; that one

recommendation was that the agencies be more transparent about

the process and framework; and that another recommendation was a

lengthening of the current annual cycle for the review process

to provide sufficient time for both the agencies and the firms.

Next, Mr. Hoyer provided a brief overview of the resolution

plan review framework, noting that it mirrored the CAMELS rating

process used for supervisory purposes, with five core

components-referred to as "pillars"-supported by a series of

factors for assessment and a series of assessment criteria to

guide consistency among the review process. He explained that

the assessment factors and criteria for the plan review

framework established a very in-depth analytical process that

could be tailored to any particular firm, as well as its

resolution plan strategy; that all of the staff associated with

the plan review have participated in a training program on the

review framework; and that the review framework was intended to

be a living document that would be updated to capture

information relative to changes in the firms' strategies. He

discussed the review framework, explaining that it operated

along two lines: (1) a vertical approach that employed multidisciplinary teams responsible for assessing the plan of each of

the firms by applying the review framework, communicating and

engaging with the firm, and collaborating with Federal Reserve

staff; and (2) a horizontal approach that employed teams

responsible for engaging across all of the firms from a

comparative standpoint, identifying similarly-situated

strategies, and coordinating that information with the vertical

teams. He explained that the vertical and horizontal teams were

in constant communication, with the pillar leads guiding those

particular discussions within their components to facilitate

sharing of information or highlight particular items; and that

the vertical and horizontal teams, together with the pillar

leads, were routinely providing status updates to the members of

an oversight group to ensure cross-coordination on issues and

communication with the Federal Reserve staff throughout the

review process.

Ms. Admati raised a number of questions regarding the

interactions and depth of review of the vertical and horizontal

teams across the firms' resolution plans and the relationship

between Title I and Title II with respect to the plans. In

response, Mr. Delfin described how the review process was

structured to ensure that key issues would be independently

evaluated by the vertical and horizontal teams across firms and

then presented to the oversight group, noting that the

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presentations to the oversight group of the teams' findings

provided opportunities to identify similarly-situated strategies

in firms and to ensure additional levels of consistency in the

FDIC's review of the resolution plans; and that the FDIC's

findings were matched with the Federal Reserve's findings to

ensure that both agencies were in agreement on the facts,

weaknesses, and issues in determining the shortcomings and

deficiencies enumerated in the letters to each of the firms. He

briefly discussed the relationship between Title I and Title II,

noting that Title I was the first step that required the firms

to show that they can be resolved in bankruptcy; that Title II

was a backstop that provided the FDIC with tools for resolution

not available under Title I, but which would be available in the

event of a failure scenario different than the one that might

have been addressed under Title I; and that the Title I

information would be integrated into planning a Title II

strategy.

Mr. Wall noted that the central interconnectedness among

the firms was an important consideration in the resolution

plans; and that there was a renewed emphasis in the guidance to

the firms to ensure that the plans address a range of adverse

scenarios and take into account scenarios where other issues may

be occurring within the financial system. Committee members

raised a number of questions relating to the agencies

interactions with the firms' senior management and the

overwhelming size and volume of information in the plans. In

response, Chairman Gruenberg noted that the facts that need to

be addressed can become so overwhelming that it would be easy to

lose track of the bigger picture; and that the preoccupation was

not with details, but with addressing the core obstacles to

resolvability and directing the firms to address those obstacles

in a meaningful way.

Mr. Wall then briefly summarized the agencies' review of

the plans submitted in July 2015 by the eight largest domestic

bank holding companies. He advised that, as a result of that

review, the FDIC and the Federal Reserve jointly determined that

each of the plans submitted by five firms-Bank of America, Bank

of New York Mellon, JPMorgan Chase, State Street, and Wells

Fargo-were not credible or would not facilitate an orderly

resolution under bankruptcy; that the agencies jointly

identified deficiencies in those plans and issued joint notices

of deficiencies to each of those firms; that, with respect to

two of the firms, the agencies did not make a joint

determination or issue notices of deficiencies, with the FDIC

determining that Goldman Sachs' plan was not credible or would

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not facilitate an orderly resolution under bankruptcy and the

Federal Reserve determining that Morgan Stanley's plan was not

credible or would not facilitate an orderly resolution under

bankruptcy; and that, with respect to one firm-Citigroup-neither

agency made a determination that the plan was not credible or

would not facilitate an orderly resolution. Mr. Wall also

advised that the agencies determined that seven of the eight

plans-with the exception of Wells Fargo-had specific weaknesses

in the plans that did not rise to the level of deficiencies, but

which constituted specific shortcomings in the plans that the

firms would be required to remediate; that the agencies issued a

guidance document of general applicability to the firms to

assist in further developing their resolution strategies; and

that the agencies issued joint letters to each firm containing

the notices of deficiencies or identifying shortcomings, or

both, as applicable to the particular firm. He explained that

the agencies' letters directed the firms whose plans were found

not credible or would not facilitate an orderly resolution-and

which were issued notices of deficiencies-to submit revised

plans remediating the deficiencies by October 1, 2016; and that

the firms that received a letter identifying shortcomings must

submit a report of the progress they have made in addressing the

shortcomings to the agencies by October 1, 2016.

In the discussion that followed, Committee members offered

their comments on a number of issues regarding the agencies'

review of the plans and guidance to the firms. In response to

Mr. Jackson asking about the difference between deficiencies and

shortcomings identified by the agencies in their review, Mr.

Hoyer explained that a deficiency was an aspect of the plan that

the agencies jointly agree would or could undermine the

feasibility of the plan's strategy; and that, in contrast, a

shortcoming was a component of the plan that raised questions

with respect to the particular strategy, but did not necessarily

undermine the strategy at this particular point. Mr. Wall also

responded, noting that deficiencies and shortcomings had

different legal consequences; that a deficiency, if not

remediated by October 1, 2016, could provide the basis for

further joint action by the agencies in the event the agencies

were jointly to determine that the lack of remediation was

sufficient to justify the imposition of further prudential

requirements; and that a shortcoming would need to be addressed

by the firm in its next plan submission in July 2017, and, if

not adequately addressed, a shortcoming could become a

deficiency that subjects the firm to a requirement for

remediation.

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Mr. Peterson commented that one of the areas the markets

currently were most interested in was total loss-absorbing

capacity ("TLAC"), particularly with regard to the type of bonds

or other debt that would qualify for bail-in or use as a capital

injection. Mr. Delfin responded by noting that the Federal

Reserve was receiving comments on a proposed rule that would

require certain institutions to meet a new long-term debt

requirement and a TLAC requirement; and that, in the Title I

process, the extent to which holding companies have sufficient

loss-absorbing capacity that can be used to recapitalize the

material entities would be defined or further enumerated by that

long-term debt rule. Mr. Hoyer also responded, emphasizing

that, if the firm has chosen a "single point of entry" ("SPOE")

strategy in its 2015 plan, they had to demonstrate the

capability to recapitalize material operating entities without

reliance on some future requirement.

Mr. Cohen commented that it would be beneficial for the

Federal Reserve to finalize the rulemaking on TLAC and single

counterparty credit limits as soon as possible, because TLAC has

the potential to place a severe limitation on the ability of

other financial institutions to hold the bailable debt. He also

observed that, notwithstanding everything in the firm's strategy

to add flexibility, a bankruptcy court could intervene and

create a real problem; and that one suggestion to avoid this

problem would be a legislative solution, such as amending the

source-of-strength language in the Dodd-Frank Act to make it a

preemptive source-of-strength obligation, which would

effectively preempt state law and the possibility of hedge funds

buying the debt and holding up the whole process.

Mr. Delfin briefly outlined the scenario of the SPOE

strategy that a number of firms, although not all, put forth in

their plans-noting that, immediately prior to the firm filing

for bankruptcy, the firm would downstream sufficient capital and

liquidity to its key subsidiaries in order to ensure that those

entities could continue operating while the parent goes into

bankruptcy, with the expectation that these entities would end

up winding down, being sold, or reentering the market at the end

of the bankruptcy proceeding. He briefly discussed some of the

key elements of the SPOE in bankruptcy strategy on which the

agencies have provided guidance, including: (1) financial

resources-sufficient capital and liquidity to ensure that those

material entities would be able to operate throughout the

bankruptcy process; (2) governance mechanisms-ensuring

mechanisms are in place so that decisions would be made when

they were supposed to be made; (3) operational-overcoming

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operational challenges associated with filing for bankruptcy;

(4) legal entity rationalization and separability-implementing a

corporate structure that facilitates resolvability and the sale

and transfer of entities; and (5} derivatives and trading

activities-ability to wind down a large derivatives book.

Mr. Hoyer discussed the agencies' review and guidance on

the financial resources element within a SPOE bankruptcy

strategy, noting that the guidance was focused on the firm

prepositioning capital and liquidity resources to provide

flexibility and mitigate impediments to recapitalizing the

subsidiaries; that the firm have the capability of maintaining a

methodology that provides the material entities with the capital

necessary to recapitalize those entities to a point that allows

them to operate through the destabilization period; and that

sufficient funding be available to meet the minimum operating

liquidity and peak funding needs for any firm or entity within

the firm-as well as a robust management information system that

can size the outflow during the destabilization period-to ensure

the firm's strategy could be successfully executed. He

emphasized that the agencies' expectations were that the firm

understand its vulnerabilities and undertake a comprehensive

analysis toward the best possible outcome to substantially

mitigate those vulnerabilities under a range of scenarios and

market conditions.

Committee members offered their comments on a number of

issues regarding the availability of funding and liquidity to

execute a SPOE bankruptcy strategy. Mr. Johnson asked if there

has ever been a self-funded bankruptcy restructuring by a large

financial company. Chairman Gruenberg responded by noting that

there never has been a set of requirements like those in Title I

in the regulatory history of the United States; that the

agencies were attempting to introduce a new set of standards and

regulatory requirements within a framework that, at a minimum,

would permit the possibility of a bankruptcy outcome for a large

financial company, combined with a public bankruptcy backstop in

the event that the bankruptcy option became unworkable; and that

the combination of these two options was an entirely new

framework within the agencies' regulatory regime to attempt a

different outcome than the one previously available, which was

open institution support for the company.

Next, Mr. Delfin discussed the governance element, noting

that this element would be the mechanism for actions that need

to be taken in order for the firm to successfully execute its

SPOE bankruptcy strategy; that there were clear triggers for

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specific actions outlined in the guidance from the agencies,

such as triggers for when to inform the firm's board of

directors of the need to move from a bad stress scenario into a

potential recovery scenario, triggers for downstreaming capital

and liquidity, and triggers for initiating actions prior to

bankruptcy.

Mr. Wall briefly discussed the operational element, noting

that there could be very significant legal challenges to the

firm's strategy that occur both pre-filing and post-filing in a

bankruptcy scenario; that one particular concern in the

agencies' review was whether the firm has a structure that would

enforce its board of directors' responsibility to make a

decision to pull those particular triggers at the time that the

firm was entering into material financial distress; and that

another concern that needed to be addressed was potential postfiling challenges to the provision of liquidity, such as

fraudulent transfer challenges, breach of fiduciary duty, or

other legal theories that would arise both under federal and

state laws. He noted that the firms were responsible for

identifying these challenges and developing strategies to

overcome them; that the agencies have highlighted specific areas

for consideration regarding how the firms could approach some of

these challenges, for example, by putting a contractually

binding mechanism in place prior to filing for bankruptcy and in

sufficient time prior to filing to survive the time periods

associated with fraudulent conveyance and other challenges,

prepositioning liquidity in a manner that could not easily be

reversed, and/or creating an interim holding company that would

serve to distance the actions of the firm's board of directors

from the provision of liquidity to the subsidiaries. Noting

that law was unsettled in this area, Mr. Cohen reiterated the

concern that a bankruptcy judge could unwind one of these

actions to downstream liquidity, noting that a legislative

solution establishing a preemptive source of strength obligation

would provide clarity to this issue.

Mr. Delfin then discussed the legal entity rationalization

and separability element, explaining that the agencies assessed

the degree to which the firms have taken adequate steps to

simplify or "rationalize" their legal entity structure and

applied legal entity criteria that, when implemented, best

aligned their corporate structure to the firm's strategy and

improved its resolvability. He emphasized that the legal entity

criteria needed to be synchronized with the firm's strategy to

ensure that its structure facilitates the recapitalization and

funding of its material entities, if that was the firm's

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strategy; that the corporate structure would facilitate the

transfer, sale, or winding down of discrete lines of business

and minimize complexity that might impede resolution; and that

the legal entity criteria should be built into the ongoing

process for creating, maintaining, and optimizing the corporate

structure, and become part of the firm's decision making as the

firm changes, grows, and moves into new jurisdictions.

Finally, Mr. Wall discussed the unique challenges of the

derivatives and trading activities element, noting that the

legal issues associated with putting in place a resolution

mechanism under the U.S. Bankruptcy Code were fundamental to the

success of the firm's plan; that, upon filing for bankruptcy,

the firm would need to file a motion with the bankruptcy court

that creates an adequate response to the bankruptcy; that, in

cases, the firms' plans would be implementation of a SPOE

strategy that envisions the creation of a successor institution;

and that a key facet of that motion would be the need to create

a structure that triggers the International Swaps and

Derivatives Association ("ISDA") protocol protections against

immediate closeout and cross-defaults with respect to the

institutional subsidiaries. He advised that the agencies' have

asked the firms to focus on how they would structure that first

day motion to ensure that it could survive anticipated

objections, which may include due process concerns, challenges

to whether or not the authority actually exists under the U.S.

Bankruptcy Code to create the new institution, the basis for

transferring assets from the debtor to the new institution, and

other issues associated with the bankruptcy court's ability to

retain jurisdiction and enforce the mechanisms that would

promote the orderly continuation of the debtor. Mr. Hoyer

briefly outlined the guidance to the firms, noting that the

agencies would look for flexibility in dealing with derivatives

and trading activities; that one strategy could be a "passive

wind-down" which assumes that the firm cannot regain market

confidence and would not have access to the bilateral markets;

that another strategy could be an "active wind-down" which

assumes that the firm would have access to the bilateral markets

to some extent to shrink their trading activities; and that the

agencies would assess the firm's strategy by focusing on the

completeness and sufficiency of the supporting analyses in the

context the firm's plan, as well as the impact of its plan on

the stability of the financial system.

During the discussion that followed, Mr. Herring asked

about the limitations of the special provisions available under

the ISDA protocol. Mr. Wall responded by explaining that the

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ISDA protocol provides for the stay of certain early termination

rights of external counterparties triggered by bankruptcy

proceedings; and that, if the criteria under the protocol have

been satisfied, early termination events cannot occur, and

normal termination and other business as usual provisions would

apply on day two after the bankruptcy filing. Mr. Bradfield

asked if the agencies were satisfied that the ISDA protocol

could cover all of the necessary protections with respect the

derivatives and termination process. In response, Mr. Wall

stated that the ISDA protocol went a long way toward reducing

the possibility of systemic contagion to a very large extent;

and that the ISDA protocol and the implementing rule to be

issued by the Federal Reserve would address the vast majority of

contracts that would be expected to terminate early. Following

additional comments from Committee members, Chairman Gruenberg

concluded the discussion by noting that the documents

summarizing the resolution plan framework and basis for the

agencies' determinations on the firm's plans, as well as the

guidance provided to the firms and issues to be addressed going

forward, currently were available on the FDIC's website; and

that, after reviewing those documents, the FDIC would welcome

any comments, suggestions, or questions from Committee members.

Chairman Gruenberg thanked the staff for the presentation,

noting that they have done a substantial amount of work in

reviewing the Title I plans; and that the FDIC's work on Title I

has moved the center of gravity on a challenging set of issues.

He then announced that the meeting would briefly recess, and,

accordingly, at 11:44 a.m., the meeting stood in recess.

* * * * * * *

The meeting reconvened at 11:55 a.m. that same day, at

which time Mr. Murton introduced the next panel to provide an

update on the FDIC's work on the Orderly Liquidation Authority

under Title II of the Dodd-Frank Act: Herbert J. Held, Deputy

Director, Systemic Resolution Planning and Implementation

Branch, OCFI; Ryan Tetrick, Associate Director, Systemic

Resolution Planning and Implementation Branch, OCFI; F. Angus

Tarpley, III, Associate Director, International Planning

Coordination and Outreach, OCFI; and R. Penfield Starke,

Assistant General Counsel, Receivership Section, Resolutions and

Litigation Branch, Legal Division.

Mr. Held began with a brief summary of the FDIC's 2012

Title II SPOE resolution strategy, noting that it accomplished

the major goals of: assuring financial stability; ensuring that

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creditors' equity bore the loss; terminating culpable

management; and providing no taxpayer support. Under the SPOE

strategy, he explained, the company would file for bankruptcy,

create a bridge holding company to which virtually all of the

assets would be transferred while leaving the liabilities

behind, the assets would be valued, and the bridge holding

company would exit by doing a debt-for-equity swap in the new

company-with the former creditors becoming the owners of the

resulting entity. He emphasized that the resulting entity

probably would still be systemic; and that the international

closeout of derivatives contracts would be problematic. He

noted that the FDIC published a Federal Register notice in

December 2013 that described the SPOE strategy in much more

detail; that, by late 2013, the Title II strategy had evolved to

provide that the firm that exits bankruptcy could no longer be a

systemically important firm; and that the current Title II

planning was focused more on optionality by providing multiple

options to deal with the crisis, depending on the firm's

condition, the state of the economy, and the firm's problems.

He explained that each of the firms has a broker/dealer

subsidiary that experiences either a complete wind-down or a

wind-down to a very much reduced entity; and that, in the FlOC's

planning, broker/dealers would wind-down on their own within a

very short period of time as the "repoH and security lending

books roll off without disruption, based on their maturity. Mr.

Tetrick noted that this would be similar to the approach

presented by many of the firms in their Title I plans-with a

solvent wind-down of their broker/dealer subsidiaries under a

SPOE bankruptcy process, except that it would be overseen by the

FDIC under Title II. Mr. Held also explained that the firms

have presented different strategies in their plans for dealing

with the size of the bank subsidiary itself, including: breaking

up the bank into three or four different parts; using initial

public offerings to return cash and stock to the bridge entity;

spinning the whole entity off to the creditors; and selling

assets or subsidiaries.

In the discussion that followed, Mr. Johnson questioned

whether the disassembling of the firms would result in the loss

of economies of scale and have implications for financial

stability going forward. In response, Mr. Held noted that

disassembling a $2 trillion bank into four, five, or six parts

would still result in very large financial institutions that

would have economies of scale; that planning for multiple

options to deal with the crisis would offer a choice of

different tools to deal with the crisis depending on where the

problems were focused, how much capital was needed for the

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resulting companies to be well-capitalized, what the market

appetite was for raising new capital, and how much the companies

would have to be reduced to avoid systemic risk. Mr. Fisher

commented that, if the resolution process works, there should be

less emergency liquidation and selling-off of assets and a

longer horizon over which to sell assets slowly in a more

considered and transparent process. Mr. Held noted that this

would not be an overnight process or fire sale-type transaction;

and that it would likely take years to actually arrange the

sales, consummate the transactions, and spin off the operating

companies. Mr. Fisher also asked how the equity in the future

holding company would be priced. In response, Mr. Held advised

that the valuation of the company after it has gone into

resolution was a key component of the resolution process,

because the new company would need to be able to provide

financial statements and do write-downs and valuations; and that

the value of the company would depend on whether the whole

company was going to exit and continue operating, or whether

pieces of the company would be spun off.

Mr. Tetrick then summarized the operational planning that

the FDIC has undertaken to develop a comprehensive resolution

framework and the capabilities to execute its systemic

resolution authorities under Title II. He noted that the

processes the FDIC has developed would be carried out from the

time contingency planning begins through exit from resolution;

and that the processes in the systemic resolution framework were

designed to be flexible and responsive to different types of

institutions and failure scenarios. He briefly described some

of the operational exercises the FDIC has designed to evaluate

and test the processes in the system resolution framework,

noting that the most recent operational exercise was held in

December 2015 to evaluate certain processes that rely on

interagency collaboration and establish some protocols and

expectations with other key-turning agencies on specific

actions, such as activating the Orderly Liquidation Fund with

the u.s. Department of the Treasury and the delivery of those

funds through the Federal Reserve Bank system. He noted that

the Title I resolution planning process has been extremely

helpful in terms of strategic thinking and development of

options in carrying out the Title II authorities. He also noted

that the FDIC has had intensive collaboration with foreign

authorities focusing on the FDIC's Title II authorities; that

operational exercises have been conducted with foreign

authorities to build bilateral relationships and establish joint

work streams on certain processes to determine what kind of home

host coordination might be needed in a resolution; and that the

April 14, 2016
124

operational exercises would continue as an ongoing program.

Mr. Tetrick continued with an overview of the five phases

in the systemic resolution process. He explained that the first

phase was the planning phase, which the FDIC has been conducting

with its advanced resolution planning through Title I and Title

II. He noted that the second phase was the determination phase,

which includes: activation of the resolution management

structure internally, domestically, and internationally with

host authorities; information requests for institutions and

other supervisory authorities to determine actions that may need

to be taken in a resolution; development of a resolution

strategy, particularly a capital and liquidity analysis;

identification of new management; and preparation of an

operating agreement and other legal documents to implement the

restructuring plan. He explained that the third phase was the

immediate stabilization phase following the receivership, which

would include: forming the bridge company; stabilizing the

group; and establishing communications to the broad public,

personnel, counterparties and customers of the firm. He advised

that the process would then transition into the fourth phase,

the orderly liquidation phase, which would include: operating

the institution as a bridge financial company; conducting a new

valuation of the firm; obtaining a fairness opinion on the

firm's valuation by an outside advisor; exchanging creditors'

claims for equity or debt in a new company; and completing

liquidation and restructuring actions necessary to exit from

resolution. He advised that the final phase was the post-exit

phase, which would include: completing the restructuring plan

after the exit from resolution; managing ongoing receivership

work and litigation; and handling post-exit communications and

statutory or other reporting.

Mr. Tarpley concluded the panel presentation with a brief

update of the FDIC's international engagement, noting that the

FDIC's work was focused on three areas: (1) bilateral outreach,

which included involvement with the Single Resolution Board

("SRB"), European Central Bank ("ECB"), the United Kingdom

("U.K."), and the Banking Union member states, such as France,

Germany, Switzerland, and Japan; (2) multilateral outreach,

which included the FDIC's work with the Financial Stability

Board ("FSB") and the SRB; and (3) institution-specific

engagement. He provided some examples on the bilateral

engagement, noting that the FDIC has engaged in tabletop

exercises hosted by Switzerland and Germany, as well as informal

and formal working groups with the European Commission and the

SRB; that the FDIC has continued to work closely with the U.K.

April 14, 2016
125

to engage and implement cross-border resolution planning; and

that the FDIC hosted a bilateral exercise with Japanese

authorities to discuss cross-border resolution issues, including

funding and liquidity, continuity of access to financial market

infrastructures, and the ISDA protocol. In the area of

multilateral outreach, he noted that the FDIC was a co-chair of

the FSB's Cross-Border Crisis Management Group for Financial

Market Infrastructures, which was developing guidance on how a

Central Counterparty could be resolved if it were to undergo

distress or failure; that the FDIC was also working on how to

address the related issue of continuity of access to financial

market infrastructures; and that the FDIC was very involved as

co-chair of the Bail-In Execution Working Group, which was

evaluating issues related to implementation of the bail-in

resolution, as well as valuation and registration issues. Mr.

Tarpley concluded by noting that, with regard to institutionspecific engagements, the FDIC has established Crisis Management

Groups (~CMGs") for the seven globally-active banks where key

host jurisdictions have been identified-Bank of America, Bank of

New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase,

Morgan Stanley, and State Street-as well as CMGs for Wells Fargo

and two insurance companies.

Chairman Gruenberg announced that the meeting would recess

for lunch. Accordingly, at 12:54 p.m., the meeting stood in

recess.

* * * * * * *

The meeting reconvened at 1:53 p.m. that same day,

whereupon Chairman Gruenberg introduced Ms. Konig, Chair of the

SRB, noting that she was a well-recognized leader

internationally in the area of financial regulation; that she

has extensive leadership experience in the area of resolution,

particularly relating to the resolution of systemic financial

institutions; and that her experience has been of great value in

addressing the very challenging assignment of establishing the

SRB.

Ms. Konig began by advising that the European Banking Union

has three components: (1) the Single Supervisory Mechanism,

which was now the single supervisory authority supervising the

largest banks in Europe, as well as cross-border banking groups;

(2) the Single Resolution Mechanism, which has the SRB at the

center of this organization focused on resolution planning; and

(3) the Deposit Guarantee System-referred to as the European

Deposit Insurance Scheme (~EDIS") -which was focused on

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126

establishing a harmonized deposit guarantee scheme within

Europe, or at least the Eurozone. She briefly discussed the

SRB's objectives, noting that it was focused on: resolution

planning; setting a minimum requirement of own funds and

eligible liabilities (~MREL")-the European equivalent to TLAC;

and removing the obstacles to resolution. Noting that the SRB

was responsible for the largest banks and cross-border banking

groups within the Eurozone, she explained that the SRB closely

cooperates with the National Resolution Authorities (~NRAs"),

which were directly responsible for supervising all of the other

banks; that cooperation with the NRAs was an important source of

information; and that the NRAs would use the SRB's resolution

planning manual in resolving smaller banks. She advised that

the resolution objectives would be to safeguard critical

functions and guarantee financial stability of the member state

or the ED as a whole; and that, for the more complex

institutions, the objectives focused on protection of public

funds, depositors, and client funds and assets. She briefly

discussed some of the issues being addressed by the SRB,

including defining what constitutes a ~critical function,"

understanding a bank's liability structure, identifying where

critical support functions were allocated, determining whether

there would be sufficient bail-in debt, and setting MREL

requirements.

Ms. Konig continued, explaining that the Bank Recovery and

Resolution Directive (~BRRD") in Europe established a legal

requirement of eight percent of bail-in of total liability as a

minimum criterion for access to the Single Resolution Fund

(~SRF"); that Europe now has a legal requirement called MREL and

an international commitment called TLAC; and that the ED

Commission has begun to discuss how to implement TLAC within the

European legislation. In response to Mr. Johnson asking if the

eight percent bail-in requirement could be waived in the event

of a potential contagion situation, Ms. Konig explained that the

BRRD contained rules for exceptional circumstances, but that the

SRB has assumed in its resolution planning that the bank would

have the required eight percent and could be resolved without

access to the SRF. She briefly discussed the framework for the

Deposit Guarantee System, noting that the fund would be built up

over a period of eight years to a total of approximately one

percent of covered deposits in the ED area; and that it would

begin with national components-since the ED was made up of

independent member states-and gradually become a European fund.

Ms. Konig concluded with a brief outline of the SRB's work

program for 2016, noting that it included continuing development

of resolution planning and preparedness, fostering cooperation

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127

with national authorities, and funding and financing for the

SRF.

In bringing the meeting to a close, Chairman Gruenberg

thanked Ms. Konig for providing the Committee an opportunity to

discuss the important and challenging work of the SRB. He also

thanked the Committee members, noting that their contributions

were exceptionally valuable to the FDIC. He concluded by

commenting that, compared to the challenges that confronted the

FDIC in 2008-when these institutions were getting into

difficulty and there were few options to deal with the failure

of these firms-it was a transformed situation in which the

FDIC's work has shifted the center of gravity in this important

area.

There being no further business, the meeting was adjourned

at 2:50 p.m.

Robert E. Feldman

.-7P/PL

Executive Secretary

Federal Deposit Insurance Corporation

and Committee Management Officer

FDIC Systemic Resolution Advisory

Committee

April 14, 2016
Minutes

of

The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

April 14, 2016 - 9:05 A.M.

I hereby certify that, to the best of my knowledge, the attached

minutes' are accurate and complete.

Martin J.

Chairman

Board of Directors

Federal Deposit Insurance Corporation,