87

The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the William Seidman Center

Federal Deposit Insurance Corporation Building

Arlington, Virginia

Open to Public Observation

December 10, 2014 - 9:03 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 ("Corporation" or "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,

Stanford, California; Michael Bradfield, Mercersburg,

Pennsylvania; H. Rodgin Cohen, Senior Chairman, Sullivan &

Cromwell LLP, New York, New York; William H. Donaldson,

Chairman, Donaldson Enterprises, New York, New York; Peter R.

Fisher, Senior Managing Director, BlackRock Investment

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

Operating Investment Officer, CaIPERS, Sacramento, California;

Richard J. Herring, Co-Director, The Wharton Financial

Institutions Center and Professor of Finance, The Wharton

School, University of Pennsylvania, Philadelphia, Pennsylvania;

Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship,

MIT Sloan School of Management, Cambridge, Massachusetts;

Donald L. Kohn, Senior Fellow, Economic Studies Program,

Brookings Institution, Washington, D.C.; Douglas L. Peterson,

President and Chief Executive Officer, McGraw Hill Financial,

New York, New York; John S. Reed, Former Chairman, Corporation

of MIT, New York, New York; Paul A. Volcker, Chairman, Trustees

of the Group of 30, New York, New York.

Members Michael C. Bodson, President and Chief Executive

Officer, The Depository Trust and Clearing Corporation (DTCC),

New York, New York; Charles A. Bowsher, Bethesda, Maryland;
(

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88

Thomas H. Jackson, Distinguished University Professor and

President Emeritus, Simon Business School, University of

Rochester, Rochester, New York; John A. Koskinen, Former (NonExecutive) Chairman of the Board of Freddie Mac, Washington,

D.C.; 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 Corporation's Board of Directors present at

the meeting were: Martin J. Gruenberg, Chairman; Thomas M.

Hoenig, Vice Chairman; Jeremiah O. Norton, Director

(Appointive); and Thomas J. Curry, Director (Comptroller of the

Currency) .

Corporation staff who attended the meeting included: John P.

Almand, Steven o. App, Cheryl Bates, Ann M. Battle, Annmarie H.

Boyd, Robert L. Burns, Fred Carns, Patricia A. Colohan, Kymberly

K. Copa, Carolyn D. Curran, Christine M. Davis, Nancy

DelCastillo, Ricardo R. Delfin, Doreen R. Eberley, Bret D.

Edwards, Diane Ellis, Joseph Fellerman, Ralph E. Frable, Judy E.

Gross, Barbara Hagenbaugh, Herbert J. Held, Michelle A. Heller,

Martin D. Henning, Brent D. Hoyer, Mona K. Jabbour, Craig R.

Jarvill, Kathy KaIser, Penny B. King, Rose M. Kushmeider, Alan

W. Levy, Roberta K. McInerney, Thomas A. Murray, Arthur J.

Murton, Richard Osterman, Bimal V. Patel, N. Michelle Rose,

Barbara A. Ryan, R. Penfield Starke, Marc Steckel, Travis M.

Sumner, Maureen E. Sweeney, F. Angus Tarpley III, David Wall,

and Barry C. West.

Paul M. Nash, Senior Deputy Comptroller and Chief of Staff,

Office of the Comptroller of the Currency; William A. Rowe~ III,

Deputy to the Chief of Staff and Liaison to the FDIC, Office of

the Comptroller of the Currency; and Jonathan Fink, Assistant

Director, Bank Activities and Structure Division, Office of the

Comptroller of the Currency, were also present at the meeting.

Chairman Gruenberg opened and presided at the meeting. He

began by welcoming the Committee members and noting that the

Committee has been extraordinarily helpful to the FDIC on the

numerous issues it has confronted in developing the capability

to manage an orderly failure of a systemically important

financial institution ("SIFI").

Chairman Gruenberg then provided an overview of the meeting

agenda, noting that it highlights the substantial progress that

has been made over the past year and focuses on several key

December 10, 2014
89

areas: (1) the process for the ~esolution plans or so-called

"living wills" that companies must submit under Title I of the

Dodd-Frank Wall Street Reform and Consumer Protection Act

("Dodd-Frank Act"); (2) resolution plan transparency; (3) recent

international developments; (4) the new protocol that has been

agreed to by the International Swaps and Derivatives Association

("ISDA"); and (5) the orderly liquidation authorities under

Title II of the Dodd-Frank Act. He advised that, in August

2014, the FDIC and the Board of Governors of the Federal Reserve

System ("Federal Reserve") sent letters to the 11 most

significant SIFIs that submitted resolution plans under the

Title I requirements; and that staff would update the Committee

on the resolution planning process and discuss the explicit

directions provided to these 11 firms concerning the steps that

need to be taken to improve their resolution plans. He also

advised that, as part of the discussion on resolution planning,

Member Herring would provide a presentation on the issues

related to improving transparency of the resolution plans. With

respect to recent developments on international resolution

planning issues, particularly cross-border cooperation with the

other major jurisdictions throughout the world, he noted that

the European community has undertaken significant institution

building in the aftermath of the crisis, with European Union

("EU") member countries implementing a single supervisory

mechanism and the European Parliament approving the creation of

a single resolution mechanism for Europe; that the European

Commission ("EC") is actively engaged in establishing that

institution and installing its board members and initial staff

in the first quarter of 2015; and that Olivier Salles from the

EC would participate in the meeting via video conference to

discuss the progress that has been made on setting up the new

institution and its authorities. Notingithat the automatic

termination of derivative contracts in the event of an

insolvency proceeding was one of the key stabilization issues

during the recent crisis, Chairman Gruenberg advised that staff

would describe the new protocol that has been agreed to by the

ISDA in an effort to address one of the core challenges to

maintaining financial stability and an orderly resolution of a

SIFI. Finally, he advised that staff would outline the progress

that has been made over this past year relating to the FDIC's

Title II orderly liquidation authorities, including an approach

for winding down a SIFI under a Title II resolution. He noted

that the FDIC recently hosted a principal-level exercise

-recently with the United Kingdom ("U.K."), which was attended by

the Chancellor of the Exchequer, the Governor of the Bank of

England, and the three Deputy Governors of the Bank of England,

as well as the U.S. Secretary of the Treasury, the Chairman of

December 10, 2014
90

the Federal Reserve, and the heads of the U.S. bank regulatory

agencies to explore issues relating tq how the U.S. would

cooperate in the event of a failure of a systematic U.S.

institution with cross-border operations in the U.K. and, in the

alternative, a failure of a U.K. institution with cross-border

operations in the U.S. Chairman Gruenberg then introduced

Arthur J. Murton, Director of the Office of Complex Financial

Institutions ("OCFI") to begin the first panel presentation.

Mr. M~~ton advised that the first panel would report on the

Title I resolution planning process, including the feedback and

guidance that the FDIC and the Federal Reserve have jointly

provided on the resolution plans, the process of engagement with

the firms on their plans, and the potential for improving

transparency of the plans. He then introduced the panel

members: Herbert J. Held, Associate Director, OCFI; David N.

Wall, Assistant General Counsel, Complex Financial Institutions

Section, Legal Division; Robert L. Burns, Deputy Director,

Complex Financial Institutions, Division of Risk Management

Supervision ("RMS"); and Richard J. Herring, Co-Director, The

Wharton Financial Institutions Center and Professor of Finance,

The Wharton School, University of Pennsylvania (also a Committee

member) .

Mr. Held began the presentation by noting that, in August

2014, the first 11 firms that filed Title I resolution plans

received very specific feedback on their plans, as well as

general feedback on issues to be addressed in the plans. He

advised that the FDIC and the Federal Reserve jointly identified

serious shortcomings to the plans and instructed the fif~S to

correct these problems in their 2015 plans; that one major

shortcoming was the reliance on unrealistic or inadequately

supported assumptions, such as the likely behavior of customers,

counterparties, investors, and central clearing facilities; and

that another major shortcoming was the failure to identify

changes to their structure and practices to enhance the

likelihood of an orderly resolution. He also advised that the

FDIC determined that each of the plans would not facilitate an

orderly resolution under the U.S. Bankruptcy Code; that the FDIC

and Federal Reserve determined that the firms must take

immediate actions to improve their resolvability through

improvements in their 2015 resolution plans; and that, in the

event the firms have not changed their plans for their July 2015

submissions and responded to the identified shortcomings, the

FDIC and the Federal Reserve expect to use the authority under

section 165(d) of the Dodd-Frank Act to determine that a

resolution plan does not meet the requirements of the Dodd-Frank

December 10, 2014
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Act. He briefly outlined some of the changes that are expected

with respect to the firms' resolution plans to demonstrate they

are making significant progress to improve resolvability under

bankruptcy, including: (1) establishing a rational, less complex

legal structure that provides a better alignment of the legal

entities and business lines to facilitate a restructuring or

downsizing; (2) developing a clean holding company structurewith only equity, debt, and investments in subsidiaries at the

parent level-that supports resolvability and avoids the

entanglements of cross-guarantees and other investments at the

holding company level; (3) amending financial contracts with

early termination rights to conform to the industry-wide ISDA

contract protocol; (4) ensuring continuity of shared services

that support critical operations and core business lines

throughout the resolution process; (5) demonstrating operational

capabilities and resolution preparedness; and (6) increasing

transparency of the resolution plans. He concluded by noting

that the FDIC and the Federal Reserve responded to Wells Fargo &

Company's resolution plan in November 2014, determining that it

provided a basis for a resolution strategy under bankruptcy

which, if fully developed in the future, could reduce the risk

that the firm's failure would pose to the stability of the U.S.;

and that the firm's 2015 plan would need to demonstrate

significant progress in addressing the identified shortcomings.

Next, Mr. Burns briefly discussed the interactions of the

FDIC and the Federal Reserve with the firms in an effort to

dramatically improve their engagement with the firms throughout

the Title I planning process. He noted that, beginning in

September 2014, the FDIC and the Federal Reserve havehe~d a

series of meetings with each of the firms to discuss t~~ __

shortcomings identified in their resolution plans and to respond

to questions regarding the changes they have been directed to

make in their existing organizational structures and practices

to improve their resolvability; that the FDIC and the Federal

Reserve are planning to hold additional meetings with the firms

in early 2015 to discuss how they intend to address some of the

major issues in their 2015 plan submissions; and that the FDIC

and. the Federal Reserve have also increased their engagement

through ongo~ng dialog with the firms during the plan review

process, as well as meetings with onsite staff of the FDIC and

the Federal Reserve. He also noted that engagement with the

firms has increased in the supervisory area with new supervisory

activities related to recovery and resolution; that the Federal

Reserve, with participation from FDIC supervisory staff,

conducted a targeted and horizontally executed supervisory

assessment of the firms' recovery and resolution preparedness to

December 10, 2014
92

identify and minimize risks to recovery and resolution; and that

these supervisory activities are focused on assessing: (1) the

firms' progress in addressing the shortcomings identified in the

supervisory letters sent to the firms, and (2) assesSing the

progress the firms are making in meeting the supervisory

expectations established by the Federal Reserve's SR Letter 14-1

issued in January 2014, which outlines minimum capabilities that

certain large bank holding companies should maintain for

effective recovery and resolution preparedness. He concluded by

emphasizing that the supervisory activities are intended to

complement, but not replace, the annual resolution plan review

process.

During the discussion that followed, Committee members

raised a number of issues relating to the Title I resolution

planning process. Member Johnson began by asking whether the

firms have been asked to consider how bankruptcy procedures

would be handled by judges in the U.K. or other jurisdictions,

and whether Title I was feasible and attainable in the absence

of a treaty between the U.K. and the U.s. to cooperate on a

bankruptcy resolution. In response, Mr. Murton noted that

global cooperation on a resolution involving a bankruptcy has

presented a challenging problem; that the firms have been asked

to explain how their entry into the bankruptcy process would

work, both in the U.s. and abroad; and that, if their plan

assumes cooperation from foreign jurisdictions, the firms must

explain the basis for that cooperation from other bankruptcy

authorities. Member Fisher asked whether it was realistic to

expect firms to change their corporate structures within a short

timeframe, particularly if they must obtain approval from

regulatory agencies in other jurisdictions, and to what extent

the capital structure of holding companies can be simplified.

Mr. Held responded by advising that the firms would be required

to make changes to their corporate structures, as well as their

back office systems; that many of the firms have multiyear plans

for changes to their systems; that the firms should have a plan

with timetables, budgets, and goals when they file their 2015

resolution plans; and that the firms' capital structures would

be better if the holding company does little business other than

investing in-its operating subsidiaries, both in terms of debt

and equity. Member Fisher also suggested that the firms are

being asked to have a plan for a bankruptcy plan in the future;

and that, in reality, the firms are being asked to have a

strategic plan to reorganize so that they have a bankruptcy

plan. Mr. Murton responded by noting that the firms have been

told that they need to demonstrate significant progress toward

improving their resolvability in their 2015 resolution plans;

December 10, 2014
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that their plans should indicate what changes would be made and

DOW long it would take to make those changes; and that the

amount of time necessary will depend on the changes that need to

be made. Chairman Gruenberg emphasized that the FDIC and the

Federal Reserve should have a better estimate of the timeframe

that will be required after the submission of the next ro~nd ofresolution plans in July 2015; that the agencies will be looking

for tangible steps to be taken by the firms to address some of

the issues in their next plan submissions; and that the firms

must layout a work plan for addressing all of the issues with a

timeframe and budget.

Member Donaldson asked what the timetable would be on the

next step after the 2015 resolution plans have been submitted.

In response, Mr. Murton advised that, after the plans are

submitted in July 2015, they would be evaluated by the FDIC and

the Federal Reserve; that, if the agencies make a determination

that the plans do not meet the standard set forth in the DoddFrank Act, then the applicable statutory provisions require the

FDIC and the Federal Reserve to issue a notice of deficiencies

to the firms, to which they must respond within 90 days; that,

in the event the response was determined to be insufficient, the

statute permits further sanctions, such as higher capital

liquidity or restrictions on operations or activities; and that,

if those measures do not correct the situation, the statute also

provides that, after a two-year period, the FDIC and the Federal

Reserve Board could require further steps, such as divestiture.

Director Curry complimented the staff for their work on the

.resolution plans, emphasizing that the simplification of the

firms' corporate structures should not focus solely on the

number of legal entities because it also was a risk management

problem for the entire organization when a disconnect exists

between the legal entities and the overall lines-of-business

approach that has been prevalent. Noting that the onsite

supervisory work represents an improvement, Director Curry asked

whether existing resources or regimes were being leveraged in

terms of recovery planning. In response, Mr. Burns advised that

the onsite supervisory work was an effort being led by the

Federal Reserve with the participation of FDIC supervisory

staff; that, during the initial phase, a considerable amount of

time has been spent inventorying all of the available

information resources that could be leveraged, including the

firms' self-assessments against the expectations laid out in the

Federal Reserve's SR Letter 14-1, information obtained through

the resolution planning process and prior plan reviews, and

supervisory findings of other regulatory agencies; and that the

December 10, 2014
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,

next phase would involve outreach to the firms for additional

information. Emphasizing that each firm's plan should be

individually evaluated because some firms may be closer to

resolvability under bankruptcy than other firms, Director Norton

cautioned that evaluating the resolution plans as a group and

signaling that every firm is on the same timeline could create a

disincentive for actual change.

Member Admati expressed concern regarding the assumptions

that the firms are expected to make for a scenario that leads to

resolvability, noting that there is a continuum of scenarios and

the firms may not have enough information to develop a plan that

takes into account all of the different scenarios. In response,

Mr. Murton agreed that there are innumerable scenarios that the

firms could face; that the firms have been asked to consider a

severely-adverse economic scenario and assume the firm would be

facing bankruptcy without access to the market for funding and

capital; and that going forward the firms may be required to

expand the set of scenarios for purposes of the Title I process.

With respect to ensuring international cooperation on a

resolution, Member Cohen suggested that, a simple "three-page"

treaty would create highly-desirable certainty; and that efforts

to make the holding companies' structures cleaner would benefit

from the issuance of final rules on Total Loss Absorbing

Capacity ("TLAC")-debt and equity available to absorb losses in

a resolution-which is a key ingredient for resolvability. Mr.

Murton agreed that the firms' long-term debt, both issued

externally at the parent and in the key material legal entities,

was a very important aspect of resolvability; and that the

agencies recognize that the interplay between the issuance of

TLAC regulations and the timing of the resolution plans.

Chairman Gruenberg noted that the afternoon session would

include a discussion of the TLAC agreement and the forthcoming

rules. Noting that the rest of the world appears to be moving

toward Title II resolvability, Member Kohn asked whether there

was a potential conflict between organizing a holding company

for a universal bank in Europe for resolution versus the way the

FDIC would want them organized for bankruptcy in the u.s. In

response, Mr. Murton indicated that all of the steps the firms

are being directed to take under the Title I process also would

facilitate the Title II process and make that result less

likely. Vice Chairman Hoenig asked whether there would also be

a treaty focused around Title II if there was one focused around

Title I, since the first issue to decide would be which rule of

law the firms would be subject to. Member Cohen agreed that any

treaty would initially need to deal with the issue of which rule

of law works best, noting that the FDIC's own studies indicated

December 10, 2014
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95

that a U.S.-U.K. treaty would address approximately 90 percent

of the issue.

Next, Member Herring presented some of the highlights from

recent research on improving the transparency of the resolution

plans. He began by noting that the core problem was the huge \

number of opaque interconnections among these firms with

hundreds or thousands of subsidiaries that, in the recent

crisis, impeded effective oversight before the crisis broke out

and greatly complicated crisis management and resolution expost. He also noted that these firms function globally as

integrated units, but need to be taken through a resolution

process as separate legal entities; that the huge number of

separate legal entities makes it enormously difficult to

coordinate resolutions in multiple jurisdictions, inevitably

resulting in the loss of any going concern value; and that the

current disclosures arguably are insufficient for creditors,

counterparties, or other interested parties to evaluate the

situation. He briefly discussed some of the dimensions of

complexity in these firms, noting that their interconnections,

the extent of their cross-jurisdictional activities, and the

large number of subsidiaries with both financial and

nonfinancial activities have increased their organizational

complexity. He suggested that regulation often increases the

corporate complexity in these firms; that the largest banks have

approximately two and one-half times as many subsidiaries as

nonfinancial corporations of comparable market capital and size;

that regulatory requirements in the U.S. have emphasized

subsidiarization and corporate separateness from the very

beginning of the Federal Reserve System; and that regulators

have the opportunity to improve transparency, for example, by

improving disclosure requirements for the public section of the

resolution plans. He indicated that tax incentives also have

contributed to the increase in corporate complexity of these

firms; that a large proportion of the firms' subsidiaries are

located in off-shore tax havens and structured solely for the

purpose of minimizing taxes; and that the potential costs and

other implications of dealing with the resulting complexity

create an obstacle to an orderly resolution of these firms that

has not been taken into account in tax policies. Finally, he

suggested that current disclosure practices have actually

hindered public monitoring of the firms' progress toward

simplification; that it was important for the public to be able

to monitor progress across institutions, as well as for the same

institution over time; and that the disclosures in the

resolution plans are inadequate because the definitions and

terminology are not applied uniformly by the firms, resulting in

December 10, 2014
96

inconsistent disclosure of information. Mr. Herring then

outlined several recommendations to improve transparency in the

resolution plans, including that: the definition of material

entity should be standardized based on consolidating statements

that take into account operating entities above a certain

threshold and intermediate-level holding companies that issue

public debt; the plans should be accompanied by an

organizational chart showing the hierarchy of material entities;

information on material entities should include data relevant to

creditors, counterparties, and regulatory authorities; entities

not considered material should be grouped into standardized

categories, with each group identified by name, location, and

primary function; information on foreign branches should be

disclosed; and consideration should be given to disclosures

relating to nonconsolidated variable interest entities. He

concluded by suggesting that disclosures of relevant data in the

firms' annual reports, Securities and Exchange Commission

("SEC") filings, and other supervisory reports should be

reviewed and reconciled; that global systemically important

banks ("G-SIBs") should be held to a higher standard with regard

to disclosure; and that the Financial Stability Board ("FSB"),

which has responsibility for designating G-SIBs, should take the

lead in harmonizing data definitions and disclosure practices to

improve transparency. for this very complex category of

institutions.

In the discussion that followed, Committee members offered

their comments on a number of issues regarding improving

transparency in the resolution plans. Member Johnson emphasized

that it was important to consider the limitations in the

existing data when comparing u.S. banks with international banks

to ensure an "apples-to-apples" comparison. In response, Member

Herring agreed, noting that there are instances involving data

on subsidiaries where he encountered substantial differences

between reporting under International Financial Reporting

Standards ("IFRS") and Generally Accepted Accounting Principles

("GAAP"). Member Fisher observed that the materiality issue was

a key aspect of motivating boards of directors and management to

make the difficult decisions necessary to comply with Title I.

On the issue of the root causes for the complexity in these

firms, Member Guillot expressed concerns regarding the

unintended consequences of pushing for simplification of

corporate structures through the resolution planning process

without addressing the underlying drivers of, and reasons for,

that complexity.

Observing that Member Herring's research has ramifications

December 10, 2014
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beyond the resolution plans, Member Cohen suggested that one of

the root causes of the financial crisis in 2008 and the

contagion that ensued was the absence of transparency; that

investors and creditors could not figure out what every

institution had; and that, while progress has been made in many

ways with respect to creating more resilient banks, little work

has been done to even broach the disclosure and transparency

issue. Noting that there has been more disclosure from banks,

he stressed that the industry was literally operating under

guidelines from the SEC on disclosure which date back to the

1970s; and that the bank regulatory agencies and the SEC should

initiate efforts to enhance that disclosure. Member Bradfield

asked whether the Office of Financial Research ("OFR") has the

authority to request this data. Member Herring responded by

suggesting that the most effective mechanism would be to collect

this data in the Title I process by working through the FSB to

make it part of the overall criteria, particularly since the OFR

may not haye the authority to request it. With respect to the

issue of taxes as a root cause of corporate complexity, Member

Kohn indicated that simplifying the number of entities could

raise taxes for u.S. institutions, placing them at a

disadvantage relative to their international peers. Member

Admati concluded the discussion by noting that the key

constituency of the information disclosures is the investors,

especially the equity investors.

Chairman Gruenberg then announced that the meeting would

briefly recess. Accordingly, at 10:39 a.m., the meeting stood

in recess.

* * * * * * *

The meeting reconvened at 10:49 a.m. that same day, at

which time Mr. Murton introduced Oliver Salles, Head of the Task

Force for the Establishment of the Single Resolution Board in

the EC's Directorate-General for Financial Stability, Financial

Services, and Capital Markets Union, and Sven Gentner, a

representative from the European Union ("EU") delegation in

Washington, D.C., who both joined the meeting via video

conference to discuss the progress the EU is making with respect

to resolution processes and establishment of the Single

Resolution Board ("SRB").

Mr. Salles began by advising that the EU has taken some

important steps over the last several years as it coordinated

reactions to the financial crisis; that the new SRB would be one

of two key elements of the Banking Union, with one being the

DecemberiO, 2014
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Single Supervisory Mechanism ("SSM") and the other being the

Single Resolution Mechanism ("SRM"); and that the scope of the

SRM would cover the same participating member states and

financial institutions directly covered by the European Central

Bank ("ECB") under the SSM. He briefly outlined the role and

powers of the SRB, noting that this new mechanism would provide

the ED with a more coordinated resolution system; that it would

facilitate more centralized decision making for responding to

potential resolution cases; and that it would have a financing

capacity through the Single Resolution Fund ("SRF"), which would

be funded with contributions from supervised financial

institutions. With respect to the SRB's role, he advised that

the SRB would have the task of coordinating the effective

functioning of the SRM; that the SRB would be directly in charge

of all significant entities supervised by the ECB and monitor

all cross-border groups established in the Eurozone; and that

national resolution authorities would be responsible for all

other types of institutions, except when the SRB decides or was

asked to take over direct responsibility on specific resolution

cases.

Mr. Salles briefly highlighted a number of dates and

milestones relating to the establishment of the SRB, noting that

the SRM regulation became effective in August 2014; that the EC

was asked to take responsibility for the establishment and

initial operation of the SRB; that he was appointed as Interim

Chair of the SRB in September 2014 and would serve until it

reached full capacity; that the SRB would become operational in

January 2015; that a permanent board for the SRB was expected to

be appointed and take office during the first quarter 2015; and

that the SRB would continue the process of recruiting staff,

with the expectation that the SRB would reach a total staff of

approximately 250 positions by the end of 2016-2017. He

emphasized that 2015 would be primarily a phase of preparation,

with the SRB starting its recovery and resolution planning

activities; and that, beginning in January 2016, the SRB would

have the full powers and capacity to address resolution cases,

propose resolution schemes, and use the Resolution Fund. He

noted that a significant portion of the powers and coordination

capacity would be the responsibility of the SRB, and that a

portion of the actions would continue to be taken at the

national level by the national resolution authorities to create

a solid and cooperative dynamic between the ED level and the

national level. He described several of the working groups that

have been established to: build a cooperation framework between

the SRB and the national resolution authorities; secure the

exchange information with the ECB, national resolution

December 10, 2014
99

authorities, and other supervisory authorities to ensure access

to necessary supervisory data; and establish the initial

priorities and work program of the SRB in coordination with the

national resolution authorities.

In conclusion, Mr. Salles emphasized that, following

completion of the initial preparatory and coordination phase in

early 2015, the SRB should be fully established and in a

position to start coordinating the drafting of resolution plans

for the most important institutions in Europe; and that the SRB

and the SRM as a whole could be ready to face potential

resolution cases in early 2016.

After thanking Mr. Salles for the presentation, Chairman

Gruenberg began the discussion that followed by asking if the

SRB was establishing a close working relationship with the SSM

to ensure coordination between the supervisory authorities and

resolution authorities, which would be critical for an effective

resolution process. In response, Mr. Salles indicated that the

SRB was working closely with the SSM and the ECB, which are both

of critical importance; that the ECB would be one dimension of

this cooperation because it would trigger the resolution

process; and that another important dimension of cooperation

would be the exchange of information and data, which most likely

would be established through a formal memorandum of

understanding between the SSM and the SRM. Noting the

complexities and different levels of the EU decision making

process, Member Johnson asked what the overall objectives of the

SRB were with respect to the balance between the national

resolution authorities and the SRB. Mr. Salles responded by

advising that the overall objective of establishing the SRB was

to contribute to financial stability in Europe; that resolution

cases would be managed in a more coordinated and planned way to

avoid the bad experiences over the last three or four years

involving the use of taxpayers' money to save financial

institutions; that it would be the responsibility of the ECB and

the SRB to monitor and oversee the resolution planning for the

120 most important institutions in Europe; and that the SRB

would be responsible for the coordination of the resolution

planning and potential resolution cases for cross-border groups.

He emphasized that the resolution decisions in Europe would be

guided and coordinated by the SRB, but the actual implementation

of potential resolution cases would be handled by the national

resolution authorities under the coordination of the SRB.

Member Admati asked how an interaction between the SRB and

the resolution authorities would operate. In response, Mr.

December 10, 2014
100

Salle noted that the SRB was still in the startup phase and that

many aspects of the EU resolution mechanism need to be

clarified, including the detailed structure of resolution plans;

that it was uncertain when the national resolution authorities

would be established in the member states because of the diverse

spectrum of situations among the participating member states,

with some important member states, such as Germany, Netherlands,

and France having well-established resolution authorities, while

some of the smaller member states are expected to rely on the

SRB to assist in establishing their resolution authorities; and

that the national resolution authorities would be members of the

plenary session of the SRB, which should facilitate cooperation

among the national resolution authorities to make decisions and

prepare the necessary instruments for resolution cases. Member

Peterson asked how the SRF would be established and how the

network of deposit insurance schemes would operate at the

national level. In response, Mr. Salles indicated that the SRF

would be established with contributions from the member states

over an eight-year period; and that the contributions to the SRF

in the early years would be coordinated at the national level,

with the SRF becoming mutualized over eight years to establish

an EU-based SRF. Mr. Gentner clarified the difference between

the SRF and the Deposit Guarantee Funds in the EU, advising that

these are two separate funds; and that the SRF would start with

national compartments before becoming a completely EU-based SRF,

while the Deposit Guarantee Funds would remain national funds

guided by EU rules. In response to a question from Member Cohen

regarding whether the SRF was a liquidity-type fund lending only

against collateral or a loss absorbency fund covering

shortfalls, Mr. Gentner advised that the SRF would be a fund

that could absorb losses.

With respect to the EU resolution process, Member Bradfield

asked whether the goal would be liquidation or restructuring.

Noting that both options would be possible with the resolution

tools provided under the EU Bank Recovery and Resolution

Directive, Mr. Salles advised that there has not been a final

decision on whether the end result should be liquidation or

restructuring, and that the SRB's experience over the next 12 to

24 months should provide more insight and clarity on some of the

options. Member Peterson asked when the largest EU banks would

have to submit their initial resolution plans and whether the

SRB would have specific authority to mandate changes to the

plans. In response, Mr. Salles noted that the SRB would be

addressing the resolution plans as one of its first priorities

over the next several months, focusing on two different

elements: (1) the capacity of the SRB to coordinate and monitor

December 10, 2014
101

resolution plans and (2) the state of participation and

readiness in some of the larger member states regarding

important institutions; and that an ambitious objective would be

to have partial resolution plans for some of the largest

institutions by the end of 2015. Noting that remarkable

progress has been made in the ED jurisdictions with respect to

resolution authorities, Member Volcker expressed concern

regarding whether the ED's resolution mechanism would mesh well

with a Title I resolution. Chairman Gruenberg responded by

emphasizing that the FDIC has placed a high priority on its

cross-border relationship with the ED's new SRM, which would

fill a critical gap in the international framework to

effectively address cross-border issues. Mr. Salles added that

a substantial amount of work still needs to be done on the ED's

resolution mechanism; and that it would take time to correctly

establish the SRB and coordination between the ED and the

national level.'

Chairman Gruenberg announced that the meeting would recess

for lunch. Accordingly, at 11:48 a.m., the meeting stood in

recess.

* * * * * * *

The meeting reconvened at 1:22 p.m. that same day,

whereupon Chairman Gruenberg thanked Member Herring for his

insightful presentation in the earlier session, noting that he

has provided a template from which the agencies can work as they

engage the firms relating to the transparency of their

resolution plans. He then requested that Mr. Murton introduce

the next panel to begin the afternoon session of the meeting.

Mr. Murton observed that one of the impediments to

resolution under bankruptcy identified in the resolution

planning process was the ability to terminate over-the-counter

("OTC") derivatives in a resolution. He then introduced Ann

Battle, Counsel, Complex Financial Institutions Section, Legal

Division, advising that she would provide an update on the new

ISDA resolution stay protocol.

Ms. Battle began the presentation with some background on

the issue of the ability of parties in OTC derivatives to

exercise termination rights and other remedies, such as setoff

against collateral, if their counterparty or any affiliate is

subject to resolution or insolvency proceedings. She advised

that, if not exercised in an orderly manner, these termination

rights and other remedies could result in additional defaults,

December 10, 2014
102

for example, affiliate defaults, unhedged positions, fire sales

of collateral, and a number of other negative consequences to

financial stability; that Title II of the Dodd-Frank Act and the

Federal Deposit Insurance Act (the "FDI Act") both contain a

one-business-day stay before a financial company's

counterparties may exercise these termination rights and other

remedies; and that, during the stay period, the FDIC as receiver

may transfer the contracts or take certain other actions, which,

if successful, result in the counterparties no longer having the

right to terminate or exercise other remedies as a result of the

resolution proceedings. Noting that the FDIC as receiver also

would have this stay authority under the Dodd-Frank Act for

financial companies resolved under Title II, she advised that

the stay may not always be enforceable in a cross-border

context; and that the U.S. Bankruptcy Code does not stay the

exercise of early termination rights and other remedies. She

continued, advising that the ISDA-which is the trade association

for buy-side and sell-side participants in the OTC derivatives

market and published most of the standard documentation used for

OTC derivatives worldwide with certain exceptions-formed a

working group in early 2013 to consider these issues; that, in

November 2013, the FDIC, Bank of England, BaFin, and FINMA wrote

a joint letter to ISDA requesting that the standard

documentation be amended to provide for a short~term suspension

of early termination rights and other remedies on the basis of a

commencement of the insolvency or resolution proceeding or the

exercise of resolution power with respect to a counterparty or

its specified entity, guarantor, or credit-support provider;

that the Japan FSA and France subsequently joined in the

recommendation made by the other authorities; and that, in

November 2014, ISDA issued the Resolution Stay Protocol.

Ms. Battle briefly described the two primary sections of

the ISDA Resolution Stay Protocol. She explained that Section 1

provides a mechanism for the enforcement of the one-business-day

limited stay provisions under Title II of the Dodd-Frank Act and

the FDI Act to foreign counterparties of the insured depository

institutions ("IDls") that are being resolved under the FDI Act

and of financial companies for which the FDIC has been appointed

receiver; that this section provides for cross-border

application of the temporary stay; that the adhering parties

"opt-in" to the stay provisions in the special resolution

regimes that may apply to their OTC derivatives counterparties

that are also adhering parties; that the special resolution

regimes initially include Title II and the FDI Act, as well

resolution regimes with temporary stays on close-out rights in

the U.K., Germany, Switzerland, Japan, and France; and that

December 10, 2014
103

resolution regimes adopted in other FSB jurisdictions that

include certain creditor protection provisions may also qualify

as special resolution regimes under Section 1. After describing

the opt-in provisions in further detail, she explained that

Section 2 addresses one of the impediments to orderly resolution

under the U.S. Bankruptcy Code by providing for temporary stays

of termination rights for cross-defaults resulting from

affiliate insolvency proceedings under a limited number of U.S.

resolution regimes, including the U.S. Bankruptcy Code and the

FDI Act; that, upon commencement of the proceedings, adhering

parties agree to be stayed for the 'longer of one business day

and 48 hours, provided that certain creditor protection

provisions continue to be satisfied; and that, similar to under

the statutory resolution regimes, the temporary stay becomes

permanent if certain debtor and possession requirements or

transfer requirements are satisfied.

Finally, Ms. Battle provided a brief overview of adherence

to the ISDA Resolution Stay Protocol and related regulation,

advising that the top 14 G-SIBs, three G-SIBs, outside of the

U.S., and one additional firm outside of the U.S. adhered to the

protocol in November 2014; that Section 1 ~ould take effect on

January 1, 2015, with respect to these initial adhering parties;

and that Section 2 would not take effect until the effective

date of regulation requiring G-SIBs and potentially certain

other financial entities to amend their aTC derivatives

contracts in a manner consistent with the protocol. Upon

related regulation becoming effective, she indicated that all

counterparties of regulated entities, including buy-side marketparticipants and smaller dealers, would have to adhere to the

ISDA Resolution Stay Protocol or enter into substantially

similar contractual amendments to their aTC derivatives

contracts; that, with respect to subsequently adhering parties,

Section 1 and Section 2 would take effect simultaneously on the

effective date of regulation requiring the amendments to aTC

derivatives contracts; and that implementation of the protocol

would likely require regulatory activity in the U.S.

In the brief discussion that followed, Committee members

asked for and received clarification on how the claims and

rights of parties to aTC derivatives would be handled under the

ISDA Resolution Stay Protocol, such as a hypothetical situation

involving a potential transfer between an adhering party and a

non-adhering party. Member Bradfield inquired whether there was

any mechanism that, despite the applicability of the stay, would

prevent the holder of the contractual rights from selling the

collateral or the counterparty refusing to turn over the benefit

December 10, 2014
104

to which the other party to the transaction was entitled,

forcing the bankruptcy estate to incur substantial litigation

costs in an effort to recover assets. In response, Mr. Wall

emphasized that it may not be possible to entirely eliminate the

need for judicial enforcement of contractual or legal

requirements if parties fail to cooperate, noting that the

existence ?f _tIle ISDA Resolution Stay Protocol should make

judicial enforcement more certain and expeditious. In response

to Member Bradfield suggesting that some form of penalty may be

appropriate to avoid that course of action and prevent systemic

issues, Ms. Battle noted that the ISDA Resolution Stay Protocol,

especially the contractual opt-in provisions of Section 1 that

make the enforcement of the stay against foreign counterparties

more certain, would potentially expedite any litigation by

establishing a clear contractual agreement that one counterparty

breached. In response to a question by Ms. Admati regarding an

update on the issue of collateral grabbing, Ms. Battle indicated

that OTC derivatives do not encompass the whole universe of

qualified financial contracts or financial contracts under the

u.S. Bankruptcy Code, noting that there has been some discussion

of extending similar provisions like those in the ISDA

Resolution Stay Protocol to other qualified financial contracts.

Chairman Gruenberg concluded the discussion by emphasizing that

there was substantial value in having the ISDA Resolution Stay

Protocol as a supplement to the FDIC's statutory authority under

the FDI Act and Dodd-Frank to impose a temporary stay; and that

substantial progress was being made on this important issue.

Mr. Murton then introduced F. Angus Tarpley, III, Associate

Director, OCFI, for a discussion of loss absorbing capacity and

the FSB's recent TLAC proposal. Mr. Tarpley began by noting

that firms need a sufficient amount of unsecured liabilities to

be able to absorb losses, stabilize the critical functions

within the organization, and execute a resolution; and that

firms also need to hold sufficient equity capital to maximize

the chances of a recovery. He advised that, in the U.S., the

Federal Reserve has discussed a potential requirement that firms

issue minimum amounts of unsecured long-term debt to address the

need for loss absorbing capacity; that, internationally, the FSB

developed and released for comment a proposal on TLAC that would

require a minimum amount of externally-issued TLAC; and that the

Basel Committee and the FSB are conducting a quantitative impact

study and market survey on a number of issues relating to

calibration of amounts, ability of the market to absorb the

level of debt required, gaps in coverage, and implementation of

the standard at the national level, including in the U.S. He

briefly discussed the two key requirements to the TLAC standard,

December 10, 2014
105

noting that one was a minimum external TLAC requirement ranging

from 16 to 20 percent of risk-weighted assets or twice the Basel

III Tier 1 leverage ratio requirement; that the requirement

would be applicable to each resolution entity within the group;

that there would be a debt component requirement that at least

33 percent of the TLAC requirement be met with either Tier 1 or

Tier 2 debt or nonregulatory capital instruments.

In response to Member Admati questioning the emphasis on

the need for debt rather than equity, Mr. Murton explained that

the FDIC is in favor of having substantial equity in the firm

which would reduce the probability of failure, but that there

was a need to have something available to absorb losses in a

resolution. Mr. Murton and Mr. Tarpley also clarified that TLAC

can be equity and debt; that there would be a total TLAC

requirement; and that a portion of that requirement would need

to be met with either Tier 1 or Tier 2 debt or nonregulatory

capital instruments. In response to Member Johnson suggesting

that the point of the TLAC requirement was to add some long-term

unsecured debt that could be converted to equity under the SPOE

strategy more easily with less systemic damage, Mr. Murton

agreed, noting that the concept was that these firms issue this

debt into the market and buyers of that debt would know that

they would be absorbing the losses in a resolution; that there

are discussions about whether other financial firms would be

able to hold this debt without fear of contagion; and that the

private sector buyers of this debt would take the losses, which

avoids having the taxpayers bear the losses. Noting that more

equity could reduce the probability of default, Chairman

Gruenberg stated that experience has shown that the risk of

failure exists regardless of the equity level and, when failure

occurs, the equity is gone; that the experience in the recent

crisis was that the taxpayers stepped into the breach to absorb

losses and avoid the consequences of failure; and that the TLAC

proposal was an effort to supplement a substantial equity

requirement with a debt requirement, which would be available

for conversion to equity in the resolution process in order to

manage an orderly failure of the firm, supported by private

sector creditors rather than taxpayers. Noting agreement with

Chairman Gruenberg's comments, Member Johnson suggested that

knowing who was holding the debt would be important to

facilitate a resolution. In response, Chairman Gruenberg

agreed, noting that this debt would be known to the market as

being at risk in the event of failure; that investors should

understand that they are taking risk by buying this debt, even

if the debt is held by a systemically-important financial

institution; and that there may be some value in terms of market

December 10, 2014
106

signaling and pricing of this debt to reflect the condition of

the firm. Member Reed suggested that lenders, when calculating

the creditworthiness of the borrower, would look at both their

equity and the loss-absorbing capability; that the lender would

understand that, if you lend to a firm and it fails, any

liabilities of the firm are at risk of loss; and that it would

be unlikely that this debt buffer would be available to

facilitate a resolution after the equity has been wiped out.

Following additional comments from Committee members on the

issue of debt serving as a mechanism to absorb losses in a

resolution, Mr. Murton introduced Rose M. Kushmeider, Director

of Policy, OCFI, advising that she would provide a brief

overview of comments received on the FDIC's Notice on the

single-point-of-entry ("SPOE") strategy issued in December 2013.

Ms. Kushmeider began by advising that 29 written comments

were received on the SPOE Notice, with the majority of the

comments focusing on specific issues, including global

cooperation, liquidity and capital, the valuation and_claims

process, the exit process from the bridge financial holding

company, and subsidiarization. With respect to global

cooperation, she reported that a number of the comments were

generally favorable to the FDIC's efforts in this area but

expressed doubt that there would be cooperation in an actual

crisis; that a number of comments favored binding agreements

with the FDIC to recognize foreign resolution regimes and

prevent ring-fencing; that other comments expressed concern

regarding change-in-control issues and foreign regulators; and

that some comments suggested amending the u.s. Bankruptcy Code

to add recognition of foreign resolution regimes. In the area

of capital and liquidity, she advised that some comments

expressed concern regarding the amount of intercompany debt

needed at each subsidiary; that some comments raised concerns on

dealing with insolvent subsidiaries, especially if there was

insufficient debt at the holding company to absorb those losses;

and that other comments questioned the availability of private

sector financing in a resolution of a SIFI. On the issue of

valuation and claims, she noted that approximately one-half the

comments expressed the need for specific information on the

valuation and claims process or a valuation model; that some

comments highlighted the difficulty of preparing financial

statements and disclosure throughout the resolution process;

that some comments suggested that there should be the equivalent

of a creditors' committee; and that a number of comments

emphasized the need to preserve the franchise value of the firm.

Turning to the issue of exit from the bridge financial holding

December 10, 2014
107

company, she reported that some comments suggested that the FDIC

should maximize value from the resolution without regard to the

post-resolution structure of the company; that several comments

emphasized that the focus should be on maximizing value for the

creditors of the company; and that other comments suggested that

the goal should be creating multiple firms that are less complex

and interconnected. Finally, with respect to subsidiarization

and whether companies should have operations abroad in

subsidiaries rather than branches to facilitate the resolution

process, she advised that a number of comments supported

subsidiarization as an effective model; and that other comments

indicated that subsidiarization would impede capital and

liquidity flows.

Next, Mr. Held presented a brief summary of the plan for

winding-down a covered financial company. He began by advising

that, in the Title II resolution, the immediate goal would be to

stabilize the company, maintain essential services, and describe

the plan and actions taken by the FDIC to wind down the covered

financial company; that the FDIC has established winding-down as

an integral part of the SPOE resolution process; that, in

addition to the changes that occur during the bridge period, the

FDIC would require the emerging company to agree to continue the

winding-down process-in post-bridge status; and that the plan

would ensure that any emerging entities would not pose a

systemic risk and would be resolvable under the U.S. Bankruptcy

Code. He continued, advising that the current efforts to

simplify operations and provide optionality in resolution would

facilitate winding-down under bankruptcy or Title II; that, in

Title II, an initial operating agreement would require the new

bridge management to formulate a plan to identify and address

the causes of the failure to ensure viability, as well as the

steps to make the firm smaller and less complex, such as more

closely aligning the operations, dividing the company into

several companies, or selling parts of entities; and that some

parts of the business would likely be liquidated as a result of

the failure, even if the entities themselves do not go through

an insolvency process. He presented a stylized organization

chart illustrating the major entities within the large firm,

noting that it would be unlikely that the commercial brokerdealer or wholesale broker-dealer entities would remain

unchanged after going through a bridge period of six or nine

months because it would be very difficult to retain talent and

keep counterparties from moving their business to other

institutions.

In the brief discussion that followed, Member Johnson asked

December 10, 2014
108

if the FDIC could keep the broker-dealer businesses operating

with the same employees and contracts. In response, Mr. Held

explained that the companies would stay in business and honor

their contracts; that it may be difficult to attract new

business to companies in bridge status; that employees may

decide not to remain with the companies; and that these types of

firms could be wound down in size very quickly by fulfilling

contracts or allowing repurchase agreements to mature. Director

Norton questioned whether customers may be less likely to move

their business elsewhere in a resolution scenario where an

operating subsidiary remained open with the Orderly Liquidation

Fund ("aLA") as its funding mechanism; and that employees with

legal agreements may remain if the operating subsidiary's status

has not changed. Member Peterson responded by noting that the

aLA funding mechanism may not be enough; that whether or not

customers remain may depend on the cause of the crisis and the

extent to which the reputation of the business may be damaged;

and that access to funding was essential to quickly taking the

actions necessary to preserve value and customers. Chairman

Gruenberg noted that the expectation under a Title II scenario

would be an orderly liquidation of the broker-dealers and

wholesale broker-dealers, and the sale of other subsidiaries

that retain some market value; that there would be a likely

shrinkage of the insured depository itself; and that, if there

was any surviving entity, it would be a dramatically smaller and

narrower entity, without the systemic ramifications of the

entity that entered the process.

Noting that a substantial amount of work has been done-with

the firms on the Title I resolution plans, Member Peterson asked

when the agencies would potentially shift from the position of

receiving information from the firms and providing guidance to

mandating changes. Chairman Gruenberg responded by advising

that the letters that were recently sent to the firms were not

advisory; that those letters directed the firms to make specific

changes that would result in both structural and operational

alterations in the firms; and that the letters sent to the firms

represent a threshold step in the whole process, with the FDIC

utilizing the resolution plans as a tool to get real-time

changes in the structure and operations of these firms that

would meaningfully facilitate an orderly failure under the u.s.

Bankruptcy Code and, if necessary, under the Title II authority.

In bringing the meeting to a close, Chairman Gruenberg

noted that the progress made on the resolution planning process

and the directions given to the firms for their compliance over

the course of the next few months, together with the development

December 10, 2014
109

of the ISDA Resolution Stay Protocol, the movement toward a

holding company debt requirement in the u.s. pursuant to the

TLAC Agreement, and the progress made on establishing crossborder relationships with key foreign jurisdictions,

particularly the United Kingdom, and assisting the EC in the

standup of the SRB, have laid the foundation and. infrastructure

for managing an orderly failure of a SIFI that did not exist

five years ago. He observed that each one of these issues was

remarkably complex and challenging; that the progress made on

the range of the issues that need to be addressed has been

substantial, and, taken together, was rather impressive; and

that there has been tangible movement toward the capability to

manage an orderly failure of one of these firms where the firm

suffers the consequences of failure without putting the

financial system itself at risk. He concluded by thanking the

~ommittee members for their participation, emphasizing that the

Committee's robust discussions and differing viewpoints were

very helpful in advancing the FDIC's thinking and consideration

of these challenging issues.

There being no further business, the meeting was adjourned

at 3:07 p.m.

@~

Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

and Committee Management Officer

FDIC Systemic Resolution Advisory

Committee.

December 10, 2014
Minutes

of

The Meeting of the Systemic Resolution Advisory Committee

of the

Federal Deposit Insurance Corporation

Held in the William Seidman Center

Federal Deposit Insurance Corporation Building

Arlington, Virginia

Open to Public Observation

December 10, 2014 - 9:03 A.M.

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

minutes are accurate and complete.

Martin ~~~ J. Gr ~berg

Chairman

Board of Directors

Federal Deposit Insurance Corporation