Resolution Plans: Regulators Have Refined Their Review Processes but Could Improve Transparency and Timeliness
Published: 2016-04-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires bank holding companies with $50 billion or more in total assets and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve to prepare plans for their rapid and orderly resolution under the Code. In 2011, the regulators issued a rule to require companies to annually file a resolution plan. If they jointly found a plan was not credible, the company could be subject to more stringent requirements. GAO was asked to review the regulators' programs for assessing resolution plans. This report examines each regulator's review processes, the progress made in assessing plans, and stakeholder views on the usefulness of the plans.
GAO analyzed FDIC's and the Federal Reserve's policies and procedures, documentation of plan reviews, guidance and feedback provided to companies, and public plans. GAO also interviewed the regulators, a judgmental sample of 25 companies (18 percent of all companies required to file a plan) based on assets, and a variety of market participants and academics based on their expertise, experience working with companies, or use of public plans.
section_title: What GAO Found
paragraphs: The Federal Deposit Insurance Corporation (FDIC) and Federal Reserve System (Federal Reserve) have developed separate but similar review processes for determining whether a resolution plan is “not credible” or would not facilitate a company's orderly resolution under the Bankruptcy Code (the Code). Both regulators have processes for staffing review teams, determining whether a plan includes all required information, assessing whether a plan's strategy mitigates obstacles to the company's orderly resolution, and documenting and vetting team findings and conclusions. Although the regulators' review processes are separate, the regulators coordinate with each other by meeting jointly with companies, working together to discuss and share review findings, and jointly issuing guidance and feedback to companies.
The regulators have made progress assessing resolution plans but have provided limited disclosures about their reviews. Following their 2012, 2013, and 2014 plan reviews, the regulators clarified and expanded their expectations for the plans—jointly providing companies with guidance or feedback. The regulators did not jointly make any not-credible determinations but reported they may do so for the 2015 plans. However, they have not disclosed their frameworks for determining whether a plan is not credible. They also developed but have not disclosed their criteria for reducing plan requirements for many smaller companies. Without greater disclosure, companies lack information they could use to assess and enhance their plans. The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities. A lack of information on how the regulators assess plans and allow some companies to file reduced plans could undermine public and market confidence in resolution plans.
In addition, the resolution plan rule requires companies to annually submit plans approved by their board of directors. However, the annual filing cycle may not be feasible. GAO found that the regulators took 9 months, on average, to complete their reviews. FDIC said companies can take up to 3 months to obtain internal approval of their plans. The regulators attributed their long review time in part to the plans' complexity, and one regulator said that companies ideally should have 6 months to incorporate feedback. Absent a longer filing cycle, companies may not have sufficient time to revise their plans to incorporate regulatory feedback intended to enhance their resolvability under the Code.
According to companies and stakeholders that GAO interviewed, resolution planning has improved the resolvability of large financial companies under the Code. Companies with $100 billion or more in nonbank assets generally said that resolution planning also had led to some operational improvements, but companies with less than $100 billion in nonbank assets generally said that they had reaped few benefits from resolution planning. However, whether the plans of the largest companies actually would facilitate their rapid and orderly resolution under the Code is uncertain, in part because none has used its plan to go through bankruptcy. At the same time, the regulators told GAO that they were incurring costs to review the plans, and companies said that complying with the rule also had raised their costs.
section_title: What GAO Recommends
paragraphs: GAO recommends that FDIC and the Federal Reserve publicly disclose information about their assessment frameworks and reduced plan criteria for smaller companies and revise the annual filing requirement. The regulators agreed with GAO's recommendations.

section_title: Letter
paragraphs: A key lesson learned from the 2007-2009 financial crisis is the importance  of advance planning for the efficient resolution—that is, the reorganization  or liquidation—of systemically important financial institutions (SIFI) that  fail. For example, Lehman Brothers’ unplanned bankruptcy filing  reportedly contributed to its disorderly resolution and intensified the  financial crisis. Lehman Brothers’ bankruptcy and the potential for more  such failures led the U.S. government to intervene to provide tens of  billions of dollars of capital and other support to a few large troubled SIFIs  out of concern that allowing them to also go into bankruptcy would have  further disrupted troubled credit markets and damaged confidence in the  U.S. financial system.
To help improve the resolvability of SIFIs and thus increase stability  during times of market stress, Section 165(d) of the Dodd-Frank Wall  Street Reform and Consumer Protection Act (Dodd-Frank Act) requires  these institutions to prepare and maintain plans (also called living wills)  for their rapid and orderly resolution under the U.S. Bankruptcy Code (the  Code). In late 2011, the Federal Deposit Insurance Corporation (FDIC)  and Board of Governors of the Federal Reserve System (Federal  Reserve) jointly issued a final rule to implement the resolution plan  requirement. Under both the statute and the rule, FDIC and the Federal  Reserve (the regulators) must review each plan and may jointly determine  that a plan is not credible or would not facilitate an orderly resolution of  the company under the Code. If a company ultimately fails to submit a  plan that demonstrates its resolvability in bankruptcy, the regulators may  jointly impose more stringent capital, leverage, or liquidity requirements  on the company or its subsidiaries or restrictions on the company’s  growth, activities, or operations.
Although resolution plans may reduce the possibility for government  support of “too big to fail” SIFIs, such plans are a new concept. For  example, at the international level, the G20 leaders committed in 2009 to  requiring SIFIs to develop internationally consistent resolution plans. In  response, the Financial Stability Board issued international standards for  resolution plans in 2011 that identified the objectives and essential  elements of the plans but provided limited guidance on how to achieve  those objectives. Similarly, while Section 165(d) of the Dodd-Frank Act  allows FDIC and the Federal Reserve to make any determination jointly  about whether a plan submitted by a company is not credible or would not  facilitate the company’s orderly resolution, the act provides no direction  on how to make such a determination. Further, as Congress has reflected  on the Dodd-Frank Act, some Congress members, academics, and others  have raised concerns about the ability of the act, including its resolution  plan requirement, to end the notion of a government bailout for financial  institutions considered “too big to fail.”
You asked us to examine the process that FDIC and the Federal Reserve  use to review resolution plans submitted in response to Section 165(d) of  the Dodd-Frank Act, including the transparency of the review process,  associated costs, and potential usefulness of the plans. This report  examines  the processes the regulators use to review resolution plans;  the extent to which the regulators have determined whether resolution  plans are not credible or would not facilitate an orderly resolution  under the Code; and  stakeholder views on the usefulness of the resolution plans to  companies and other stakeholders.
To examine the process used by the regulators to review resolution plans  and the extent to which the regulators have determined whether  resolution plans are not credible or would not facilitate an orderly  resolution under the Code, we reviewed the Dodd-Frank Act, the final  resolution plan rule, and FDIC and Federal Reserve documentation of  plan reviews conducted for plan years 2012 through 2014, as well as  guidance and feedback the regulators provided to companies. To  examine what is known about the usefulness of the resolution plans to  companies and other stakeholders, we systematically selected and  interviewed 25 companies that filed a resolution plan in 2014 about the  benefits, costs, and challenges associated with the plans. The companies  we interviewed represented all filing groups, or waves, including 10 of the  18 Wave 1, Wave 2, and designated nonbank filers, and 15 of the 120  Wave 3 filers (see below for more description of the filing waves). In  addition, we judgmentally selected and interviewed a sample of 20  stakeholders—including bankruptcy attorneys and consultants, industry  groups, credit rating agencies, investors, and academics—about the  usefulness of the resolution plans. They were selected based on their  subject matter expertise, experience helping companies prepare  resolution plans, or use of the public versions of the resolution plans for  their own purposes. We also interviewed officials from other federal  agencies about their involvement with resolution plan reviews. For all  objectives, we interviewed FDIC and Federal Reserve officials. For more  information on our methodologies, see appendix I.
We conducted this performance audit from November 2014 to April 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Bank Holding Companies and the Bank Holding Company Act
paragraphs: Large banking organizations in the United States generally are organized  as bank holding companies, which are companies that can control,  among other entities, one or more banks. Typically, a large U.S. parent  (or top tier) bank holding company owns a number of domestic depository  institutions that also engage in lending and other activities. A holding  company may also own nonbanking and foreign entities that engage in a  broader range of business activities, which may include securities dealing  and underwriting, insurance, real estate, leasing and trust services, or  asset management. Some large U.S. bank holding companies have  thousands of subsidiaries. Figure 1 provides a simplified example of a  large bank holding company’s structure.
The Bank Holding Company Act of 1956, as amended, contains a  comprehensive framework for the supervision of bank holding companies  and their nonbank subsidiaries. Generally, any company that acquires  control of an insured bank or bank holding company is required to register  with the Federal Reserve as a bank holding company. Under the Bank  Holding Company Act, these companies are subject to, among other  things, consolidated supervision by the Federal Reserve. Further, the act  restricts the activities of the holding company and its affiliates to those  that are closely related to banking or, for qualified financial holding  companies, activities that are financial in nature.
section_title: Resolution Plans and Orderly Liquidation Authority under the Dodd- Frank Act
paragraphs: The Section 165(d) resolution plan requirement is one of many Dodd- Frank Act provisions and related reforms designed to help restrict future  government support for and reduce the likelihood and effects of the failure  of SIFIs. Such reforms include the act’s (1) restrictions on the Federal  Reserve’s emergency authorities to provide assistance to financial  institutions; (2) new tools and authorities for FDIC and the Federal  Reserve to resolve a failing SIFI outside of bankruptcy if its failure would  have serious adverse effects on the U.S. financial system; (3) enhanced  regulatory standards for SIFIs related to capital, liquidity, and risk  management; and (4) other reforms intended to reduce the potential  disruptions to the financial system that could result from a SIFI’s failure,  such as the Volcker rule and swaps clearing and margin requirements.
subsections: section_title: Resolution Plans
paragraphs: Title I of the Dodd-Frank Act requires bank holding companies with $50  billion or more in consolidated assets and nonbank financial companies  designated by the Financial Stability Oversight Council (FSOC) to  periodically submit to FDIC, the Federal Reserve Board, and FSOC  resolution plans that detail how the companies could be resolved in a  rapid and orderly manner in the event of material financial distress or  failure. If FDIC and the Federal Reserve jointly determine that a  resolution plan is not credible or would not facilitate an orderly resolution  under the Code, they must notify the company in writing of such a  determination and identify the aspects of the plan that the regulators  jointly found deficient, and the company must submit a revised plan that  remedies the deficiencies. If the company fails to resubmit a credible plan  that adequately remedies the deficiencies, FDIC and the Federal Reserve  may jointly impose more stringent capital, leverage, or liquidity  requirements; restrict growth, activities, or operations; and, if within two  years after the implementation of those requirements the company has  failed to resubmit a resolution plan with the required revisions, in  consultation with FSOC, require the company to divest itself of certain  assets or operations.
Section 165(d) of the Dodd-Frank Act requires resolution plans to include  the following information:  the manner and extent to which any insured depository institution  affiliated with the company is adequately protected from risks arising  from the activities of any nonbank subsidiaries of the company; descriptions of the company’s ownership structure, assets, liabilities,  and contractual obligations; and  identification of the cross-guarantees tied to different securities,  identification of major counterparties, and a process for determining to  whom the collateral of the company is pledged; and any other information that the Federal Reserve and FDIC jointly  require by rule or order.
FDIC and the Federal Reserve’s final resolution plan rule took effect in  November 2011. The rule requires companies subject to the rule to file  plans annually but implements filing deadlines on a staggered schedule  that is generally based on companies’ total nonbank assets (or, in the  case of foreign-based companies, their total U.S. nonbank assets). The  groups of filers required to meet each deadline are known as waves (see  table 1). As table 1 shows, the first wave—the largest bank holding  companies—generally were required to file their initial resolution plans in  2012, while the other companies (Waves 2 through 4) were not required  to file their initial plans until 2013 or later.
According to the resolution plan rule, a company’s plan must be divided  into a public section and a confidential section. The latter section must  include seven informational sections: (1) executive summary, (2) strategic  analysis, (3) description of corporate governance relating to resolution  planning, (4) description of organizational structure and related  information, (5) management information systems, (6) interconnections  and interdependencies, and (7) supervisory and regulatory information.  In the strategic analysis section—generally the most substantive  component—each company must describe the key assumptions and  supporting analysis underlying the plan, the specific actions the company  must take to facilitate a rapid and orderly resolution, the strategy for  maintaining the operations of and funding for the company and its  material entities, and the actions the company will take to prevent or  mitigate any adverse effects of a failure. The strategy must also describe  any potential material weaknesses or impediments to the plan, and the  actions and steps the company has taken or proposes to take to  remediate or otherwise mitigate the weaknesses or impediments  identified by the company.
As noted earlier, although any determination that a company’s plan is not  credible or would not facilitate an orderly resolution under the Code must  be made jointly, neither the statute nor the resolution plan rule requires  the regulators to make such a determination each time they review the  plans, even if they identify shortcomings in a company’s plan. As of  January 2016, the regulators have not yet jointly determined that any  companies’ plans are not credible or would not facilitate an orderly  resolution under the Code. Specifically, FDIC’s Board of Directors  determined that the Wave 1 filers’ 2013 plans and three of the Wave 2  filers’ 2014 plans were not credible or would not facilitate an orderly  resolution under the Code. However, the Federal Reserve Board of  Governors did not make a similar not credible determination, but instead  said that the companies must take meaningful action to improve their  resolvability under the Code. The Board of Governors noted that this  action was consistent with the statement in the resolution plan rule’s  preamble that the initial resolution plans would provide the foundation for  developing more robust plans over the next few years.
section_title: FDIC Insured Depository Institution Resolution Plans
paragraphs: Complementing the 165(d) resolution plan requirement, FDIC adopted a  final rule in January 2012 requiring an insured depository institution with  $50 billion or more in total assets to periodically provide FDIC with a  contingent plan for the resolution of such institution in the event of its  failure. The rule requires that the plan enable FDIC, as receiver, to  resolve the institution under Sections 11 and 13 of the Federal Deposit  Insurance Act. The plan must ensure that depositors have access to  their insured deposits within 1-business day of the institution’s failure and  that the plan maximizes the return from the sale or other disposition of  any assets and minimizes the amount of loss realized by creditors.
section_title: Orderly Liquidation Authority
paragraphs: In cases where resolution of a financial company under the Code may  result in serious adverse effects on U.S. financial stability, the orderly  liquidation authority set out in Title II of the Dodd-Frank Act serves as the  backstop alternative. Orderly liquidation authority gives FDIC the  authority, subject to certain constraints, to resolve large financial  companies, including nonbanks, outside of the bankruptcy process. FDIC  may be appointed receiver for a financial company if the Secretary of the  Treasury, in consultation with the President, determines, among other  things, that the company’s failure and its resolution under applicable  federal or state law, including bankruptcy, would have serious adverse  effects on U.S. financial stability and no viable private-sector alternative is  available to prevent the default of the financial company. While the  Dodd-Frank Act does not specify how FDIC must exercise this authority,  FDIC has been developing approaches to resolving a company under the  orderly liquidation authority, including one that it refers to as the single- point-of-entry approach.
section_title: International Coordination on Resolution
paragraphs: U.S. regulators have coordinated with foreign counterparts through the  G20 and the Financial Stability Board to develop a policy framework for  addressing the risks posed by SIFIs. In November 2010, G20 leaders  endorsed the Financial Stability Board’s framework for reducing the  probability and impact of the failure of SIFIs. Key elements of this  framework include developing effective resolution regimes for these  institutions. FDIC, the Federal Reserve System, and Treasury helped to  develop international standards that the Financial Stability Board issued  for resolution regimes in October 2011. According to the Financial  Stability Board’s November 2015 progress report, only a subset of its  member jurisdictions, mostly those home to global, systemically important  banks, have a bank resolution regime with a scope and range of powers  that is broadly in line with the international resolution standards. It also  reported that all global, systemically important banks have recovery plans  and crisis management groups, but significant work remains to make  resolution strategies and plans operational.
section_title: U.S. Bankruptcy Code, Financial Companies, and Federal Regulators
paragraphs: Bankruptcy is a federal court procedure conducted under the Code.  Under the resolution plan rule, companies must describe how they would  be resolved or reorganized under Title 11 of the Code, which includes  Chapter 11. A reorganization proceeding under Chapter 11 allows a  debtor that is a commercial enterprise to continue to operate some or all  of its operations subject to court supervision as a way to satisfy creditor  claims. The debtor typically remains in control of its assets under a  Chapter 11 proceeding, but in some cases the court may direct the U.S.  Trustee to appoint a Chapter 11 trustee to take over the affairs of the  debtor. Chapter 11 proceedings can be voluntary (initiated by the debtor)  or involuntary (generally initiated by at least three creditors holding at  least a certain minimum amount of claims against the debtor).
Certain financial institutions may not file as debtors under the Code, and  other entities face special restrictions in using the Code.
Insured depository institutions: Under the Federal Deposit Insurance  Act, FDIC serves as the conservator or receiver for insured depository  institutions placed into conservatorship or receivership under  applicable law.  Insurance companies: Insurers generally are subject to oversight by  state insurance commissioners, who have the authority to place them  into conservatorship, rehabilitation, or receivership.
Broker-dealers: Broker-dealers can be liquidated under the Securities  Investor Protection Act or under a special subchapter of Chapter 7 of  the Code. However, broker-dealers may not file for reorganization  under Chapter 11.
Commodity brokers: Commodity brokers, also known as futures  commission merchants, are restricted to using only a special  subchapter of Chapter 7 for bankruptcy relief.
Regulators often play a role in financial company bankruptcies. With the  exception of the Commodity Futures Trading Commission and Securities  and Exchange Commission (SEC), the Code does not explicitly name  federal financial regulators as a party of interest with a right to be heard  before the court. In practice, however, regulators frequently appear  before the court in financial company bankruptcies. For example, as  receiver of failed insured depository institutions, FDIC’s role in  bankruptcies of bank holding companies is typically limited to that of  creditor. The Commodity Futures Trading Commission has the express  right to be heard and raise any issues in a case under Chapter 7. SEC  has the same rights in a case under Chapter 11. SEC may become  involved in a bankruptcy particularly if there are issues related to  disclosure or the issuance of new securities. The Commodity Futures  Trading Commission and SEC also are involved in Chapter 7  bankruptcies of broker-dealers and commodity brokers. In the event of a  broker-dealer liquidation, pursuant to the Securities Investor Protection  Act, the bankruptcy court retains jurisdiction over the case and a trustee,  selected by the Securities Investor Protection Corporation, typically  administers the case. SEC may join any Securities Investor Protection  Act proceeding as a party.
section_title: FDIC and the Federal Reserve Review Resolution Plans Separately but Coordinate on Key Aspects of Reviews
paragraphs: FDIC and the Federal Reserve have developed separate but similar  processes for their reviews of companies’ resolution plans. Both  regulators have processes for staffing review teams, determining whether  a plan includes all required information, assessing whether a plan’s  strategy mitigates obstacles to the company’s orderly resolution, and  documenting and vetting team findings and conclusions. Although the  regulators’ review processes are separate, the regulators coordinate with  each other in various ways, such as in their discussions about review  findings and their communications with companies.
subsections: section_title: Regulators Have Created Separate but Similar Processes for Reviewing Resolution Plans
paragraphs: FDIC and the Federal Reserve have separate but similar processes for  reviewing resolution plans. For instance, both developed strategies for  reviewing plans and provided their review teams with guidance on  implementing the strategies. As shown in figure 2, FDIC and the Federal  Reserve each have two committees—composed of senior staff—that offer  direction to review teams on plan assessment strategies. We found that  both FDIC and the Federal Reserve typically prepare scoping  memorandums or project plans to structure their upcoming plan reviews.  For example, two FDIC scoping memorandums we reviewed for Wave 2  companies included key areas of focus, background information from  previous plans, and assignments of specific review components and  products to be delivered. We also reviewed two Federal Reserve project  plans for Wave 3 companies—one for larger companies and another for  smaller companies—that included objectives of the review, governance,  responsibilities, products to be delivered, and timelines, among other  items.
Both FDIC and the Federal Reserve have separate review teams for each  wave of plan filers. As shown in figure 3, FDIC’s Office of Complex  Financial Institutions and the Division of Risk Management Supervision’s  Complex Financial Institutions Section share responsibility for reviewing  resolution plans submitted by the Wave 1 filers, two of the four Wave 2  filers, and the nonbank filers. The Division of Risk Management  Supervision’s Large Bank Supervision Branch reviews plans submitted by  the Wave 3 filers and the other two Wave 2 filers. Subject matter experts  in issue areas such as legal, resolution, and international from other FDIC  divisions participate on reviews as needed.
Within the Federal Reserve System, 10 Federal Reserve banks review  resolution plans of companies located in their district, with assistance, as  needed, from subject matter experts. The Federal Reserve Bank of New  York conducts most of the reviews, given that more than 75 percent of the  Wave 1 and 2 companies and designated nonbanks and about two-thirds  of the Wave 3 companies are located in its district.
For the Wave 1 and 2 companies and designated nonbanks, both  regulators assign a team of around five to six staff to review each  company’s plan. For Wave 3 companies, FDIC generally assigns a five- to-six person team to review multiple Wave 3 plans, and the Federal  Reserve generally assigns a two person team to review each plan (see  figure 3).
During their plan reviews, FDIC and Federal Reserve teams assess  whether submitted resolution plans are informationally complete. As  noted, the resolution plan rule includes seven informational requirements,  such as an executive summary, strategic analysis, and description of  organizational structure. We found that to determine whether submitted  plans contain all required information, both regulators use similar  checklists to conduct and document their completeness reviews. Teams  typically are given about 2 weeks to conduct the completeness review.
Following their completeness reviews, we found that FDIC and Federal  Reserve teams then conduct two types of more substantive reviews of  companies’ plans. First, the regulators conduct vertical, or company- specific, reviews to identify issues, shortcomings, and obstacles to  resolvability. As shown in table 2, FDIC and the Federal Reserve focus  their vertical plan reviews on similar assessment areas. For example,  we found that both regulators assess how the companies plan to  maintain, transfer, sell, or wind down their critical operations—defined in  the final rule as the operations of the company for which the failure or  discontinuance would pose a threat to the financial stability of the United  States—in an orderly manner through the resolution process. Second,  FDIC and Federal Reserve teams conduct horizontal reviews to examine  selected issues across multiple companies. For example, FDIC’s 2015  plan review included a horizontal review of the governance mechanism  across all Wave 1 and 2 companies. According to FDIC officials, the  horizontal reviews supplement the vertical assessment of key issue areas  and promote consistency across the plan reviews. In addition, we found  that the regulators use horizontal reviews to help inform their general  guidance and decision-making around resolution planning.
The regulators each prepare an overall summary memorandum  documenting each plan review and, in some cases, supporting  memorandums for specific assessment areas. They also typically prepare  memorandums documenting their horizontal reviews. Finally, the  regulators have developed or are currently developing assessment  frameworks that they use or plan to use to determine whether aspects of  a resolution plan are deficient based on their vertical and horizontal  reviews. Specifically, FDIC recently developed a framework that rolls up  the findings of its five assessment areas into three broader areas, each of  which includes a short list of key questions that—combined with staff  judgment about each company’s facts and circumstances—are used to  determine whether a plan is deficient. Federal Reserve officials told us  that they are currently developing a similar framework and have recently  used FDIC’s framework to guide interagency discussions. According to  FDIC and Federal Reserve officials, teams generally complete their  vertical reviews within about 2 months, and horizontal reviews can take  approximately another 2 months.
Since their initial reviews in 2012, FDIC and the Federal Reserve  periodically have revised parts of their review processes based on  lessons learned. For example, as described earlier, in 2014, FDIC revised  its approach to plan assessments by establishing key assessment areas  to frame its review. In addition, FDIC officials told us that because of the  large number of Wave 3 companies, FDIC developed an information  technology tool for recording responses from Wave 3 filers’ plans. The  tool serves to allow staff to consistently capture information and run  standard and customized reports as needed. The Federal Reserve  reported that in 2013, it automated its obstacles log—an electronic  database in which reviewers catalog each obstacle to rapid and orderly  resolution at each material entity—by prepopulating cells with drop-down  menus based on reviewers’ 2012 findings on Wave 1 filers’ plans. The  Federal Reserve also noted that it simplified its completeness review  process in 2013 as well as leveraged analyses it conducted in 2012 to  identify Wave 1 companies’ critical operations, rather than repeating the  analyses.
After teams complete their reviews, their findings are subject to further  review and vetting at a higher level. According to FDIC, for the regulator’s  Wave 1 and 2 reviews, the Oversight Group, an interdivisional group of  senior executives, directs vertical and horizontal team efforts, reviews  staff-level shortcomings and deficiencies to be included in company- specific feedback letters, recommends industry-wide guidance and action  items, coordinates with Federal Reserve senior staff to help ensure  consistency across reviews, and recommends staff-level findings to the  FDIC Board of Directors. For FDIC’s Wave 3 reviews, the Division of Risk  Management Supervision’s Large Bank Supervision Branch created an  interdivisional resolution plan review committee, which serves a similar  purpose as the Oversight Group for Wave 1 and 2 reviews. At the Federal  Reserve, the Federal Reserve Board’s Recovery and Resolution Planning  Section performs the same tasks under the direction of the two  Resolution Plan Vetting Committees and in consultation with the review  teams and legal staff.
Finally, FDIC’s Board of Directors and the Federal Reserve’s Board of  Governors separately review and vote on staff recommendations on the  credibility of plans, requests for filing extensions, and joint feedback  letters provided to companies. Although each board votes separately, to  make a joint determination under the act—for example, to determine that  a plan is deficient—each board must vote to approve the action.
section_title: FDIC and the Federal Reserve Coordinate on Various Aspects of Their Reviews
paragraphs: FDIC and the Federal Reserve have coordinated not only on reviews of  resolution plans but also on the development of the review process. For  example, Federal Reserve officials stated that in 2012, the regulators  initially held joint training sessions. Also, the Federal Reserve developed  a preliminary methodology for identifying critical operations and  collaborated with FDIC to implement it. Subsequently, FDIC and the  Federal Reserve worked together to refine the list of critical operations  and identified whether a company had critical operations and, if so,  notified the company of the operations they deemed critical before the  company submitted its initial plan.
During the review process, FDIC and the Federal Reserve coordinate  with each other in a number of ways. For example, the two regulators  independently determine the scope of their plan reviews, but FDIC  officials told us that they compared their assessment areas and generally  agreed on the same areas of focus. Similarly, FDIC and Federal Reserve  officials said that the regulators shared their training materials with each  other. Officials from both regulators also told us that they coordinated  their meetings with companies to minimize any duplicative efforts, and  that senior staff schedule weekly calls and periodic meetings to discuss  findings and any issues identified during the review process. The officials  noted that they were often in daily communication with each other during  the plan reviews. Finally, while review teams from each regulator were  not initially allowed to share internal review documents with one another  without prior approval, FDIC authorized teams to share such information  without prior approval beginning with the 2014 pilot reviews.
After the teams complete their separate reviews, the regulators work  together to reach agreement on the findings and conclusions that they  use to make recommendations for their respective boards’ consideration.  For example, FDIC officials told us that after the regulators completed  their reviews of Wave 1 filers’ 2013 plans, the regulators jointly identified  a number of issues with the plans and then, with little dissension, agreed  on prioritizing and addressing them. The regulators also have coordinated  on the guidance and feedback they provide to companies.
Officials from both regulators told us that at this time, they were not  considering combining their staffs to form one team to jointly review and  assess resolution plans. According to FDIC officials, the FDIC Board  needs to be able to make its credibility determinations based on its own  independent analysis. Federal Reserve officials told us that because most  of a plan review involved reading and analysis, there would be few  efficiency gains from doing the work jointly. But officials from both  regulators emphasized to us that the current process was collaborative  because the review teams were in regular communication with each  other. As we have previously reported, to achieve a common outcome,  collaborating agencies should establish mutually reinforcing or joint  strategies to achieve a common outcome. Such strategies help in  aligning the partner agencies’ activities, core processes, and resources to  accomplish the outcome. In addition, agencies should establish  compatible policies, procedures, and other means—such as frequent  communication—to work across agency boundaries. Given FDIC’s and  the Federal Reserve’s similar review strategies, coordinated approach to  communicating with companies, and frequent communication with one  another, their resolution plan review processes—while conducted  separately—are generally collaborative.
section_title: FDIC and the Federal Reserve Have Made Progress Assessing Resolution Plans but Have Faced Challenges Providing Transparent and Timely Feedback
paragraphs: FDIC and the Federal Reserve have made progress reviewing the  resolution plans that companies submitted each year from 2012 to 2014  but have provided limited disclosures about their reviews and have not  always provided companies enough time to incorporate feedback given  the annual filing cycle. As previously noted, under the resolution plan rule,  the regulators are required to review submitted plans and are allowed, but  not required, to jointly determine whether the plans are deficient. FDIC’s  Board of Directors determined that all of the Wave 1 filers’ 2013 plans  and three of the Wave 2 filers’ 2014 plans were not credible or would not  facilitate an orderly resolution under the Code. However, the Federal  Reserve Board of Governors did not make such a determination but  instead said that the companies must take meaningful action to improve  their resolvability under the Code. The Board of Governors noted that this  action was consistent with the statement in the resolution plan rule’s  preamble that the regulators did not expect that the initial resolution plan  iterations submitted after this rule takes effect will be found to be deficient  and that the initial resolution plans would provide the foundation for  developing more robust plans over the next few years. The regulators  issued press releases in August 2014 and March 2015 stating that they  expected to jointly determine that the resolution plans submitted by Wave  1 and 2 filers, respectively, in 2015 were deficient if the filers had not  made sufficient improvements.
subsections: section_title: Regulators Have Refined Guidance and Feedback
paragraphs: Although the resolution plan rule sets forth the information companies  must include in their plans, the regulators have clarified, revised, and, in  some cases, expanded information requirements through their guidance  and feedback. To a large extent, we found that the guidance and  feedback has focused on the rule’s strategic analysis, which must  describe a company’s plan for a rapid and orderly resolution under the  Code. For example, to address shortcomings found in Wave 1 filers’ 2012  plans, the regulators issued publicly available guidance (April 2013)  instructing the filers, among other things, to support the assumptions  underlying their resolution strategies, discuss steps to mitigate five  obstacles the regulators identified as common during a resolution, and  provide a detailed description of their planned bankruptcy process in their  subsequent plans. Following their review of the Wave 1 filers’ 2013  plans, the regulators issued each filer a feedback letter that identified  shortcomings and provided additional information and regulator-specified  assumptions for the 2015 plans (see table 3). The feedback letters also  directed the filers to improve their resolvability under the Code—for  example, by establishing a rational and less complex legal structure,  developing a holding company structure that supports resolvability, and  ensuring the continuity of shared services that support critical operations  and core business lines throughout the resolution process.
Consistent with the resolution plan rule’s preamble, which conveyed  expectations that the review process would evolve, the guidance and  expectations communicated to companies have evolved over time. The  regulators—in addition to finding shortcomings in a number of the  companies’ assumptions—also have had to clarify their expectations  about such assumptions through several rounds of feedback. For  example, from April 2013 to August 2014, the regulators clarified  previously provided assumptions for Wave 1 filers—such as a company’s  assumptions about its access to government funding. Additionally, the  regulators clarified and expanded assumptions—for instance, about the  likely behavior of foreign authorities, counterparties, and others—that  companies were to make in their subsequent plans. In September 2014,  FDIC and Federal Reserve officials jointly met with each Wave 1 filer to  discuss the feedback letters. Based on our review of the meeting notes,  we found that companies continued to ask for additional clarification  about the assumptions and expanded requirements introduced in the  feedback letters.
In December 2014, the regulators offered to preview certain elements of  Wave 1 filers’ 2015 plans and then in February 2015 provided the filers  written feedback on the plan previews. We reviewed the feedback to  Wave 1 filers and found that it included company-specific feedback,  identifying instances in which, for example, a company made an  unallowable assumption or did not provide adequate support for an  assumption. The regulators also clarified additional plan assumptions and  requirements introduced in the August 2014 feedback letters.
Generally, the regulators took a similar approach with the Wave 2 and 3  filers (see table 3 above), sending them individual letters setting out  general directions after reviewing their initial plans (filed in 2013). They  also sent individual letters that provided more detailed guidance after  reviewing the 2014 plans (see table 3). As discussed below, however, the  regulators have exempted a majority of Wave 3 companies from most of  the plan requirements.
Wave 1 and 2 companies we interviewed generally said the regulators’  feedback was limited. For example, most of the 10 companies we spoke  with said that the guidance and feedback lacked specificity and seemed  to be generally aimed at the industry as opposed to individual companies.  One company told us that it was not clear how the regulators defined a  “rational and less complex legal structure.” Nonbank financial companies  we interviewed said the lack of specificity in regulators’ guidance was a  significant challenge. At the same time, several companies also told us  that guidance and communication from the regulators had improved more  recently. For example, as noted, the regulators met with the companies in  September and December 2014 and then in February 2015 provided  written feedback on the previews of companies’ 2015 plans.
Nearly all of the 15 Wave 3 companies we interviewed told us that they  generally had not received any company-specific feedback on their 2013  plans from the regulators. For example, two companies said the  regulators told them to consult the guidance for Wave 1 companies and  incorporate elements applicable to the company. Nearly all of the 15  companies told us that the lack of feedback from the regulators was a  challenge in complying with the resolution plan requirement. Moreover,  several Wave 3 companies we interviewed said that the regulators  seemed to take a one-size-fits-all approach to resolution planning, and  some pointed out that these companies were less complex than the Wave  1 companies and should be given guidance tailored to less complex  companies.
FDIC and Federal Reserve officials generally said their guidance and  processes have evolved through the iterations of plan reviews. According  to the Federal Reserve officials, they initially focused their plan reviews  on identifying potential obstacles to a resolution and, accordingly, they  also focused their initial guidance on such obstacles. Officials also said  that as their knowledge about the companies increased, they were able to  issue more specific guidance and feedback to companies. Similarly,  FDIC’s officials told us that in the initial years of plan reviews, they  focused on the obstacles and basic elements of the plans—including  financial, operational, and structural aspects of a company’s resolution  strategy—and had little dialogue with the companies. Since then, officials  added that they have issued more detailed guidance, conducted more  substantive plan reviews, and increased communications with the  companies. FDIC officials also said that while guidance generally has  been targeted to Wave 1 filers, it has been adjusted for Wave 3 filers,  given the differences in complexity between the Wave 3 and Wave 1  filers. Based on our review of the July 2015 feedback letters sent to Wave  3 filers, we generally found that the guidance did not include some of the  requirements that were in the August 2014 feedback letters sent to Wave  1 filers, such as the need for companies to achieve a rational and less  complex legal entity structure.
section_title: Regulators’ Frameworks for Assessing Plans Are Not Transparent
paragraphs: FDIC and the Federal Reserve have each developed or are currently  developing a framework for assessing whether plans are deficient, but  they have not disclosed the frameworks to plan filers or the public. As  discussed, for its 2015 reviews, FDIC refined its assessment approach by  dividing its plan review into five components: (1) an assessment of a  company’s critical operations, (2) stress scenario leading to a bankruptcy  filing, (3) strategy for resolving its material legal entities, (4) readiness to  implement its strategy, and (5) resolution planning governance process.  In addition, FDIC recently developed a framework that distills the five  components into three principal areas and includes a series of questions  that are used to determine whether aspects of a plan are deficient based  on the staff review findings. As summarized by FDIC officials, they use  the framework to determine whether a resolution plan will work, whether a  company can implement its plan, and whether the company has  integrated resolution planning into its corporate governance structure.  According to the officials, their resolution plan assessment framework has  been shared with the Federal Reserve and agreed upon as a means to  create a common intersection between the two regulators’ independent  plan review processes. Federal Reserve officials told us that they used  FDIC’s assessment framework to guide interagency discussions during  their recent plan reviews. They added that they are currently developing  and expect to finalize their own framework in early 2016, with slight  differences based on lessons learned from their review of companies’  2015 plans.
However, companies lack a full understanding of the regulators’ overall  assessment frameworks for determining whether aspects of a plan are  deficient. While the regulators jointly issued public guidance in April 2013  to Wave 1 filers, the guidance has been supplemented in part by  subsequent written and oral feedback provided to each company that has  clarified and expanded existing assumptions and requirements. Further,  similar to bank examination findings, such feedback is considered  confidential supervisory information, prohibiting the companies from  disclosing or discussing it with each other. Although companies generally  have been provided feedback about their plan shortcomings, they have  not been provided with any assurances that addressing the shortcomings  would mean that the regulators would not find aspects of their plans  deficient.
Further, FDIC’s and the Federal Reserve’s feedback did not fully clarify  their overall assessment frameworks for the companies whose plans  were under review. Nearly all of the eight Wave 1 and 2 companies we  interviewed believed that credibility was a subjective standard that the  regulators had not clearly defined, presenting challenges for the  companies. Several companies described a sense of uncertainty about  what changes they should make to their plans, with one specifically  saying that the companies could waste time and money working toward  an unclear objective. Two of the companies explained to us that there  was more than one way to achieve resolution but that it was not clear  which options the regulators would find credible. Finally, another  company told us that because of the subjective nature of the credibility  assessment, it was concerned about the penalties the regulators might  assess if its plan was found deficient.
FDIC and Federal Reserve officials told us that, at the highest level,  determining whether a plan was not credible involved judgment about the  nature of each company and its resolution strategy. Because all  companies and their resolution strategies are different, certain  shortcomings may be much more important for one company than  another, and the statute gives the regulators discretion in determining  how findings under the various assessment factors affect a plan’s overall  credibility. The regulators’ frameworks enable them to apply their expert  judgment to the facts and circumstances of each company’s plan. FDIC  views its framework as confidential supervisory information and thus has  not disclosed it. FDIC officials told us that they are considering the policy  implications of such disclosure. Importantly, disclosing the assessment  framework, at least in an abbreviated form, would provide companies with  a more comprehensive understanding of the principal factors that the  regulators use to identify plan deficiencies. In turn, companies could use  such information to evaluate their own plans, identify potential  deficiencies, enhance their plans, and prioritize their remediation efforts.  The disclosure of the assessment framework would be similar to the  disclosure of FDIC’s and the Federal Reserve’s bank examination  manuals, which are publicly available on their websites. According to the  Office of Management and Budget’s directive on open government,  transparency promotes accountability by providing the public with  information about government activities. Similarly, our prior work has  recognized that transparency—balanced with the need to maintain  sensitive regulator information—is a key feature of accountability.  Without more fully disclosing the regulators’ frameworks for reviewing  plans and identifying plan deficiencies, the companies lack key  information for assessing and improving their plans. In addition,  companies and the public have a limited basis for understanding how the  regulators are fulfilling their responsibility under the resolution plan rule,  which could undermine the public’s confidence in the resolution planning  process. For example, companies and the public would not know the  extent to which FDIC’s and the Federal Reserve’s frameworks for  determining whether a plan is deficient are similar or different.
section_title: Regulators Have Reduced the Plan Requirements for the Majority of the Wave 3 Companies but Have Not Disclosed Their Criteria for Doing So
paragraphs: FDIC and the Federal Reserve recognize the limited benefit of requiring  many smaller, less complex Wave 3 companies to file a full resolution  plan, but officials said that it was important to continually monitor Wave 3  companies for potential sources of systemic risk through their plan  submissions. In addition to permitting companies with limited nonbanking  operations to file a tailored plan, the rule permits the regulators to further  reduce the information required in a company’s plan. Following their  review of Wave 3 companies’ 2013 plans, the regulators exercised this  authority—allowing 61, or about 52 percent, of the companies to file  “reduced plans” in 2014. Under the 2014 reduced plans, companies were  exempted from most of the resolution plan rule’s informational  requirements and were required to only report whether they had (1) made  any material changes that required their prior plans to be modified or (2)  taken any actions to improve their resolvability. In that regard, reduced  plans still provide the regulators with a way to monitor such companies.
Following their review of the Wave 3 filers’ 2014 plans, the regulators  permitted 90 of the filers, or about 76 percent, to file a reduced plan for  the 2015 plans, and another 12 percent were permitted to file tailored  plans (see fig. 2). According to FDIC officials, all 90 companies that are  permitted to file a reduced plan are foreign banking organizations with  limited U.S. operations.
FDIC officials told us that the regulators considered a number of factors in  permitting certain Wave 3 companies to file reduced plans. They said that  the regulators gained a better understanding of the companies, their  plans, and the potential effect of their failure on U.S. financial stability,  and adjusted some of their criteria to allow a greater number of Wave 3  filers to file reduced plans in 2015. However, the regulators did not  disclose their criteria for granting the exemptions from most of the plan  requirements in their joint feedback letters to the Wave 3 companies or  publicly. Generally, FDIC and Federal Reserve officials said that the  application of their criteria could reveal confidential information, and FDIC  officials stated that this was in part because their criteria may reflect  proprietary or sensitive company information. As noted earlier, the Office  of Management and Budget’s directive on open government and our prior  work have recognized that transparency is a key feature of accountability,  even when there is a need to safeguard certain sensitive information to  protect companies and markets. Without greater transparency, the lack  of a clear understanding of the regulators’ decisions, including the  reasons for viewing certain companies as less risky and allowing certain  companies to file reduced plans, may weaken public and market  confidence in resolution planning and limit the extent to which the  regulators can be held accountable for their decisions. For example,  without knowing why the companies qualified for filing a reduced plan,  they and other Wave 3 companies would not know what steps, if any,  they could take to decrease their risk profile and qualify for a reduced- plan filing in future years. Moreover, Wave 3 filers and the public also  would not know whether the reduced-plan benefit was provided  consistently.
section_title: Annual Filing Requirement Has Created Challenges for Regulators and Companies
paragraphs: Although the Dodd-Frank Act did not specify the frequency with which  companies had to file their resolution plans, FDIC and the Federal  Reserve stipulated in the resolution plan rule that companies had to file  plans approved by their boards on an annual basis. However, the rule  does not require FDIC and the Federal Reserve to substantively review  the plans or provide feedback within any set time frame. As shown in  table 4, our analysis of the 2012, 2013, and 2014 resolution plan reviews  found that the regulators required around 5 to 13 months (or close to 9  months on average) to review the plans and jointly provide companies  with written guidance or feedback. The review process can be resource- intensive: As discussed, the review process involves a number of steps— including vertical and horizontal assessments, internal and interagency  discussions, drafting of guidance and feedback, and board  determinations. Unless the regulators extended the plan submission date,  companies would have about 3 months, on average, to incorporate the  feedback, obtain their boards of directors’ approval, and file their plans for  the next year.
Because of the amount of time required to review the Wave 1 filers’ initial,  or 2012, plans, FDIC and the Federal Reserve jointly extended the filers’  2013 resolution plan filing date from July 1, 2013, to October 1, 2013.
However, the Wave 1 filers submitted their 2014 plans before the  regulators could provide them with feedback on their 2013 plans. As a  result, the regulators instructed the Wave 1 filers to incorporate the  feedback in their 2015 plans and conducted an abbreviated review of the  Wave 1 filers’ 2014 plans.
FDIC and the Federal Reserve generally prepared project plans or similar  documents for each review of a wave of resolution plan submissions that  included target dates for completing key tasks. However, in reviewing the  regulators’ project plans, we found that the plans did not always include a  date for providing joint feedback, and for those project plans that did,  target dates were missed. For example, although FDIC and the Federal  Reserve set dates for completing specific phases of their plan reviews,  the regulators did not set a date for providing joint feedback to the Wave  1 filers’ 2013 plans. The Federal Reserve planned to provide Wave 2  filers with feedback on their 2013 plans by the end of 2013 but did not  provide them with feedback until mid-April 2014. Similarly, the Federal  Reserve set target dates for providing Wave 3 filers with feedback on  their 2013 plans but required more time.
FDIC and Federal Reserve officials told us that the 2013 plans were  complex and had multiple shortcomings that caused delays in providing  feedback. According to Federal Reserve officials, the teams generally  completed their review of the plans and prepared necessary internal work  products in about 4 months, in accordance with the proposed deadlines.  Moreover, FDIC officials said that regulators generally agreed with each  other about the facts and findings. Officials from both regulators said their  main challenge was sorting through the various fundamental issues that  appeared across the filers’ plans, developing agency plans to address  those issues, and crafting language to include in feedback. The officials  told us that the regulators wanted to make sure they provided the  appropriate response and chose the best approaches to address the  issues. Federal Reserve officials also said that reaching joint agreement  on issues and feedback added some time.
FDIC and Federal Reserve officials told us that they recognize the  constraints the companies have experienced because of the timing of the  regulators’ feedback. FDIC officials said that they expected the content  and timing of feedback to be more specific to each company’s plan in the  future, which could affect the timing of the feedback. Although Section  165(d) of the Dodd-Frank Act directed the Federal Reserve to require  companies to file their resolution plans periodically, FDIC and the Federal  Reserve required companies to annually file resolution plans approved by  their board of directors in the resolution plan rule. However, the resolution  plan rule’s annual filing cycle may not be feasible. We found that the  regulators took 9 months, on average, to review plans and provide  companies with joint feedback. At the same time, FDIC officials said that  companies need up to 3 months to obtain internal approval of their plans,  and FDIC staff keep that in mind when requesting turnaround times from  companies. Federal Reserve officials attributed their long review time, in  part, to the plans’ complexity and said that companies ideally should have  6 months to incorporate regulatory feedback. However, Federal  Reserve officials said that it currently is not realistic to expect the  regulators to review plans in 6 months or the companies to address the  feedback fully in their allotted remaining time. Federal internal control  standards state that agencies should externally communicate the  necessary quality information to achieve their objectives and that  information should be readily available to recipients when needed. With  regard to resolution plans, the agencies must be able to provide not only  quality information—such as guidance or feedback—to companies but  also sufficient time for the companies to incorporate the information in  their plans. Absent a longer filing cycle, the rule may not effectively allow  for the achievement of its intent.
Companies faced challenges because of the lack of timely guidance or  feedback from the regulators. More than half of the 25 companies we  interviewed, including companies from each wave, identified concerns  about the timing of the regulators’ feedback. Two companies told us they  received feedback late in their planning process, making it difficult or  impossible for them to incorporate the feedback into their next plans.  Similarly, another company told us that it was expensive to revise its plan  when feedback was provided in the late stage of the planning process.  Furthermore, eight of the Wave 1 and 2 and nonbank filers told us that  the amount of time it took them to prepare their resolution plans ranged  from 6 months to a year. Finally, four other companies told us that the  timeliness of the feedback needed to be improved, with one suggesting  that the regulators issue feedback at the beginning of the planning year.
section_title: Stakeholders’ Views on the Usefulness of Resolution Plans Vary
paragraphs: According to companies and stakeholders that we interviewed, resolution  planning has improved the resolvability of SIFIs under the Code. The  larger filers we interviewed generally said that resolution planning had led  to some operational improvements, while the smaller filers we interviewed  generally said that they had reaped few benefits from resolution planning.  Additionally, regulators are using plans to enhance their supervision of  large financial companies. However, uncertainty exists about the plans’  ability to provide for a rapid and orderly resolution of the largest SIFIs, in  part because none has used its plan to go through bankruptcy. At the  same time, the regulators told us that they were incurring considerable  costs to review the plans, and companies said that complying with the  rule also had raised their costs.
subsections: section_title: Companies and Stakeholders Generally View Resolution Planning as Improving Resolvability
paragraphs: In concept, resolution plans are expected to make the U.S. financial  system safer and help end “too big to fail” by enabling SIFIs to be  resolved in an orderly manner that does not have adverse effects on U.S.  financial stability or require taxpayer funds. Because of the size,  complexity, or interconnectedness of the Wave 1 companies, the failure  of one of them poses the threat of disrupting U.S. financial stability. Under  the rule, companies must prepare strategies and financial projections in  their resolution plans using assumptions about funding, liquidity, and  market conditions under baseline, adverse, and severely adverse  economic conditions. In response to the resolution plan rule, the Wave 1  filers have prepared resolution plans and made structural and other  changes to become more resolvable.
Most of the 10 Wave 1, Wave 2, and nonbank filers and 20 stakeholders  whom we interviewed told us that going through the planning process  better positioned companies for an orderly resolution or had the potential  to reduce systemic risk. For example, a bankruptcy attorney told us that  resolution planning had benefited companies by forcing them to engage  in comprehensive thinking for the first time about how to undergo a  resolution. Additionally, a consultant said that the value of resolution  planning lay in the development of the companies’ underlying operational  and business capabilities to undergo a resolution process. Officials from a  Wave 1 filer also told us that through resolution planning, the company  had identified and mitigated obstacles to its resolution, better positioning it  to be resolved under the Code.
At the same time, around half of these filers and other stakeholders told  us that they did not expect companies to be able to use their plans as a  playbook in the event of failure. For example, one bankruptcy attorney  said that the written plan itself was less beneficial than the planning  process because the actual cause of bankruptcy could differ from the  hypothetical scenario in the plan. Another bankruptcy attorney told us that  it was important for companies to think through how they might react  under various circumstances, but a resolution plan was just a strategy  and did not reflect exactly what a company would do if it failed. A  consultant said that the resolution plans themselves were not a source of  value, because the likelihood that a company’s resolution plan would  match the actual conditions or events under which the company  undergoes a resolution process was low. Additionally, officials of a Wave  1 filer explained that they distinguished between planning and writing the  plan and noted that while the planning process had been beneficial, the  resolution plan itself likely would not be useable in the event of failure.
In their 2015 public plan disclosures, the Wave 1 filers generally stated or  indicated that they believed that their resolution plans would effectively  resolve them within a reasonable time frame, without systemic disruption,  and without taxpayer assistance. In addition, these companies identified  in their public plans an array of actions they had taken or were in the  process of undertaking to enable them to be resolved in an orderly  manner under the Code. For example, actions taken by Wave 1 filers in  response to the August 2014 feedback letters include the following.
Establish a rational and less complex legal structure that would  take into account the best alignment of legal entities and  business lines. To achieve this objective, at least 9 of the 11 filers  stated in their public plans that they have taken one or more of the  following actions: (1) reduced assets, businesses, and legal entities;  (2) grouped legal entities with common features into separate  ownership chains under common holding companies to simplify the  spin-off of businesses in a resolution scenario; (3) exited certain lines  of businesses or services; or (4) created separate retail and  institutional broker-dealers. Through these changes, a company can  improve its resolvability by reducing the effect of one subsidiary’s  failure on an affiliate and improving the ability to separate and transfer  specific businesses within the company. addition, in accordance with a Federal Reserve rule, the four foreign  Wave 1 companies are establishing intermediate holding companies  in the United States to, among other things, support resolvability.
Wave 1 filers have adhered to the International Swaps and  Derivatives Association (ISDA) Stay Protocol. The ISDA Stay Protocol  overrides a broad range of default rights, including termination of  transactions, which are triggered by the parent or other affiliate  entering resolution. The protocol serves to provide time to facilitate an  orderly resolution of a company by imposing a stay on derivatives  contracts and other qualified financial contracts, following the  company’s bankruptcy. numerous subsidiaries on three different  continents.
The filing created an “event of default” for  its derivatives, resulting in the termination  of more than 900,000 contracts.
The lack of access to computer systems  and personnel made it difficult to manage  the wind down of the company after the  broker-dealer had been sold.  Intercompany financial information was  shut down when a subsidiary entered  insolvency, enormously affecting the  company’s ability to generate information,  efficiently liquidate assets, and realize  maximum value.  Information was spread across 2,700  software applications across the globe  and had to be retrieved from among  thousands of accounts and cross- referenced for accuracy.
Demonstrate that shared services, supporting critical operations  and core business lines—such as information technology  services—would continue throughout the resolution process. To  achieve this objective, at least 10 of the filers have taken one or more  of the following actions: (1) developed employee retention plans to  support critical operations and core business lines from stress to  resolution; (2) placed critical shared services staff and assets in  service subsidiaries that operate as stand-alone entities or  subsidiaries of the company’s bank; or (3) enhanced legal  agreements between material entities to enable continued access to  intellectual property and information technology in a resolution  scenario. Through such structural, contractual, and other changes, a  company can help ensure that it has continued access to critical  shared services, information, and employees needed to execute its  resolution strategy in an orderly and timely manner.
Demonstrate that operational capabilities—such as providing  information on a timely basis—that are necessary for resolution  are in place. To address this objective, at least 10 of the filers have  taken steps to enhance their operational capabilities, such as by  enhancing their (1) collateral management reporting to provide an  enterprise-wide view of collateral holdings in each jurisdiction, by legal  entity, and by line of business; or (2) management information system  capabilities to produce, for example, information for each material  legal entity. Access to timely information is important in helping to  facilitate the resolution of large, complex companies with extensive,  global operations. For example, these reporting capabilities would  help the company to access critical information, such as the location  of collateral or the identity of key employees or counterparties, and  avoid disruptive aspects during resolution.
section_title: Companies’ Views on Usefulness of Resolution Planning Varied by Wave
paragraphs: According to nearly all 10 of the Wave 1, Wave 2, and nonbank filers we  interviewed, some of the steps they have taken to improve their  resolvability also have improved aspects of their business operations. For  example, one filer said that examining contracts to avoid internal  contagion—the possibility that problems in one legal entity could spill over  to other legal entities—had benefited the company’s risk management.  Another filer told us that the company had a better understanding of its  subsidiaries, which is useful in running the company, because of the  changes it had made to its management information systems in response  to resolution planning. In its public plan, one company said that it had  incorporated resolution planning into its business processes when  considering whether it should engage in acquisitions or new products.  Some companies also said that the resolution plan requirement had  accelerated or expanded projects that already were underway to improve  business operations. Other ancillary benefits cited by the filers include  helping educate employees about the company and bringing more  transparency to settlement risk and intraday liquidity.
In contrast to the larger filers, most of the 15 Wave 3 filers we interviewed  told us that they had reaped few to no benefits from resolution planning,  although several Wave 3 companies noted that the process had given  them a better understanding of the company. Several of these companies  said that because of their simple organizational structure, they did not  make any material changes or improvements in response to resolution  planning and therefore did not achieve many, if any, benefits. For  example, one reduced-plan filer said that the resolution plan was simply  another report that the company was required to file. In contrast, four  Wave 3 companies we interviewed told us their companies had benefited  from resolution planning. For example, one of these filers said that the  company’s new focus on legal entities helped it realize more operating  efficiencies.
section_title: Regulators Expect to Use Plans to Enhance Their Supervision or Related Activities
paragraphs: FDIC and the Federal Reserve also expect to use resolution plans to  enhance their supervision of large financial companies. In addition to  helping ensure that such companies can be resolved in a rapid and  orderly manner, the regulators detailed in the final rule’s preamble three  ways in which they planned to use the resolution plans:  to support FDIC’s planning for the exercise of its resolution authority  pursuant to the resolution authority granted in Title II of the Dodd- Frank Act and the Federal Deposit Insurance Act,  to assist the Federal Reserve in its supervisory efforts to ensure these  companies operate in a safe and sound manner that does not pose  risks to U.S. financial stability, and  to enhance their understanding of the U.S. operations of foreign  banks and improve efforts to develop a comprehensive and  coordinated resolution strategy for a cross-border company.
Established in 2010, FDIC’s Office of Complex Financial Institutions is  responsible for, among other things, reviewing 165(d) resolution plans  and preparing and implementing resolution plans to be used under  FDIC’s Title II authority. The office has been developing Title II resolution  plans for the largest financial companies covered by Title II to ensure that  FDIC is prepared to serve as receiver if any of these companies fail.  Importantly, such plans may draw on the strategy and information  elements in a company’s 165(d) plans. According to FDIC officials, the  regulator has tools that the companies do not have under the Code, such  as access to temporary liquidity, but the 165(d) resolution plans have  been helpful in planning for their resolution authority under Title II. The  officials said that FDIC would need to address many of the same  obstacles to rapid and orderly resolution that the companies are  confronting in their plans. These obstacles include reducing the  interconnectedness of material entities and improving the timely access to  information necessary to resolution.
According to Federal Reserve officials, they are actively working to  integrate resolution preparedness into their permanent supervisory work.  For example, the regulator’s Large Institution Supervision Coordinating  Committee recently implemented the Supervisory Assessment of  Recovery and Resolution Preparedness, a horizontal exercise that  evaluates certain large companies’ options to support recovery and  progress in removing impediments to orderly resolution. As detailed in  the August 2014 feedback letters, the actions the regulators expected the  Wave 1 filers to take to improve their resolvability formed the basis for the  horizontal exercise, according to Federal Reserve officials. They plan to  undertake the exercise annually. Moreover, the officials said that the  Supervisory Assessment of Recovery and Resolution Preparedness was  the first step in incorporating resolution planning into their overall  supervisory framework, and the Federal Reserve plans to continue to  build on this effort.
As part of the regulators’ enhanced understanding of foreign banks  through resolution planning, FDIC and the Federal Reserve have  undertaken efforts to promote cross-border coordination and cooperation  on the resolution of global, systemically important banks. For example,  FDIC and the Bank of England, in conjunction with prudential regulators  in their respective jurisdictions, developed contingency plans for the  failure of one of these companies with U.S. and United Kingdom  operations. Similarly, FDIC and the European Commission have  established a joint working group to focus on resolution and deposit  insurance issues, and FDIC also has collaborated with regulators in  Switzerland, Germany, and Japan to discuss cross-border issues and  impediments affecting the resolution of these companies. As part of a  mandate, the Federal Reserve established company-specific crisis  management groups for each of the globally systemically important banks  headquartered in the United States, which are co-hosted with the FDIC  and comprised primarily of each company’s prudential supervisors and  resolution authorities in the United States and key foreign jurisdictions.  According to a Federal Reserve official, these groups are working to  mitigate potential cross-border obstacles to an orderly resolution of these  companies. Federal Reserve officials told us their participation in these  discussions has been beneficial to help clarify confusion among foreign  authorities about the difference between Title I and Title II resolution  under the Dodd-Frank Act.
section_title: Whether the Plans Provide for a Rapid and Orderly Resolution Is Uncertain, and Plans for Wave 3 Companies May Not Be as Critical for Systemic Risk Reduction
subsections: section_title: Ability of Plans to Provide for an Orderly Resolution Is Uncertain
paragraphs: Although companies have made progress developing resolution plans to  improve their resolvability under the Code, stakeholders and others have  identified several factors that create uncertainty about the plans’ ability to  provide for a rapid and orderly resolution of the largest SIFIs. First, all but  two of the domestic Wave 1 and Wave 2 companies use a single-point-of- entry strategy in their 2015 resolution plans, but this is a legally novel  strategy. The foreign Wave 1 companies use a combination of closing  and selling businesses in their plans, but prefer a single-point-of-entry  strategy for their global resolution plans. According to their public plans,  these companies generally intend to revisit this strategy for their U.S.  resolution plans after establishing their intermediate holding companies.  As of March 2016 and since the resolution plan rule was finalized, none of  the plan filers has gone through bankruptcy and legally tested the single- point-of-entry strategy. Some companies and experts that we interviewed  view single-point-of-entry as a promising strategy but acknowledge that  its ability to facilitate a rapid and orderly resolution of a large SIFI is still  uncertain. Some academics have noted that the strategy may work if the  failure is limited to the U.S. holding company but may not work if a foreign  subsidiary of the U.S. holding company is the source of the failure.
Second, most of the 20 stakeholders we interviewed maintain that the  Code may not be adequately designed to resolve large SIFIs. In prior  reports, we have detailed a number of challenges the Code presents in  relation to the resolution of these companies.
Financial regulators that may be aware of potential systemic  consequences, do not have standing to be heard before the court as a  party of interest or the ability to file an involuntary bankruptcy petition  against a financial company, including in response to balance-sheet  insolvency.
The Code does not provide for guaranteed funding for failing  companies. Experts generally considered funding mechanisms  essential for the orderly resolution of large financial companies. Title II  provides FDIC with access to an emergency liquidity fund, but there is  nothing comparable under the Code.
Qualified financial contracts, such as derivatives and repurchase  agreements, receive safe-harbor treatment under the Code. These  contracts are not subject to the Code’s automatic stay and can be  liquidated, terminated, or accelerated in the event of insolvency. The  ISDA Stay Protocol, as mentioned above, begins to address this issue  and overrides a broad range of default rights through contractual  changes. However, the ISDA Stay Protocol covers only companies  that voluntarily agree to the protocol. In November 2014, 18 major  global banks signed the protocol.
The Code generally covers only the U.S. operations of companies and  has limited provisions for cross-border cooperation between the  bankruptcy courts and other jurisdictions.
Congress has considered revising the Code, especially in reference to  addressing the treatment of qualified financial contracts. The Hoover  Institution resolution project group has also proposed a new chapter— Chapter 14—of the Code to address issues related to bankruptcies of  large financial companies.
Finally, a resolution plan is not legally binding, including on a bankruptcy  court or other resolution authority. According to a House of  Representatives report, large financial companies are not required to file  for bankruptcy and could have an incentive to wait to file to force FDIC to  resolve the company under Title II. Resolution planning also involves a  broad array of assumptions about how other stakeholders will behave,  including creditors and other counterparties who must accept the  reorganization plan and judges who confirm the final plan. These  assumptions introduce uncertainty, both for the companies in developing  their plans and the regulators in determining whether they are not  credible.
section_title: Individual Wave 3 Companies May Not Pose Systemic Risk
paragraphs: According to nearly all 15 of the Wave 3 companies and most of the 20  stakeholders we interviewed, resolution plans for most of the Wave 3  filers may not reduce systemic risk. Most stakeholders told us that the  failure of most Wave 3 companies would not threaten U.S. financial  stability generally because of their limited size and complexity. As noted  earlier, the regulators have exempted 90 Wave 3 filers from most plan  information requirements, recognizing the limited benefit of requiring  these companies to file a full resolution plan. At the same time, FDIC  officials said that it was important for the regulators to continue to monitor  these companies because of their potential to change in size or  complexity that could pose systemic risk. Additionally, FDIC officials said  that because the Wave 3 companies had a sizable collective presence  and were interconnected with other companies in the U.S. financial  system, their resolution plans could provide valuable information in  understanding company operations and resolution strategies on an  industry-wide basis. They explained they might explore other areas of  potential risk related to these companies. Federal Reserve officials also  noted that while most Wave 3 filers did not pose a systemic risk, there  could be a situation in which they did—for instance, if all companies in a  region experienced financial stress at the same time.
A Federal Reserve Governor and some members of Congress have  questioned the $50 billion threshold for the resolution planning  requirement and other enhanced prudential standards under the Dodd- Frank Act. In a 2014 speech, a Federal Reserve Governor said that he  favored increasing the asset threshold for companies that fall under the  resolution plan requirement, because the failure of most of these  companies would not produce considerable negative effects on the  financial system. In addition, Congress is considering raising the  automatic SIFI threshold from $50 billion or more in total assets to $500  billion or more in total assets. For bank holding companies with $50  billion to $500 billion, the bill would create a multistep process to  determine if a bank holding company should be designated as  systemically important and required to abide by the additional rules to  which those bank holding companies are subject, such as the resolution  plans. The systemically important determination is based on a  foundational determination that material financial distress of that entity  could pose a threat to U.S. financial stability. This change could eliminate  the resolution plan requirement for some Wave 3 companies, but the  extent to which this could happen cannot be determined because the  designation process involves regulatory and FSOC discretion.
We found that U.S. bank holding companies that are Wave 3 filers were  typically smaller, less interconnected, and less complex than those that  are Wave 1 and 2 filers. To assess the extent to which filers in different  waves have the potential to adversely affect the financial system or the  broader economy if they become distressed, we constructed indicators of  filers’ size, interconnectedness, and complexity as of the second quarter  of 2015. Our indicator of size is a filer’s total assets. Our indicators of  interconnectedness are the gross notional amounts of credit default  swaps outstanding for which a filer is the reference entity and a filer’s total  debt outstanding, excluding deposits. Our indicators of complexity are the  number of a filer’s legal entities, the number of a filer’s foreign legal  entities, and the number of foreign countries in which a filer’s foreign legal  entities are located. We then compared the median values of the  indicators for domestic Wave 1 and 2 filers to the median values for  domestic Wave 3 filers (see table 5). These indicators suggest that  domestic Wave 3 companies have less potential to adversely affect the  financial system or broader economy if they become distressed.
While our approach allows us to compare indicators of size,  interconnectedness, and complexity for domestic Wave 1 and 2 filers to  those for domestic Wave 3 filers, our indicators have limitations and  should be interpreted with caution. For example, our indicator of size  does not include off-balance-sheet activities and thus may understate the  amount of financial services or intermediation a filer provides. In addition,  our indicators of interconnectedness may not reflect all of the channels  through which a filer could affect other parts of the financial system.  Similarly, our indicators of complexity may not capture all relevant types  of complexity. Nevertheless, differences in our indicators provide  important context regarding the relative potential for filers in different  waves to adversely affect the financial system or the broader economy if  they become distressed.
section_title: Stakeholders Believe the Public Plans Are of Limited Use and Raised Concerns about the Lack of Transparency from the Regulators
paragraphs: As previously mentioned, the resolution plans include a public and private  section, and the public sections generally have been of limited use to  stakeholders, but FDIC and the Federal Reserve have taken action to  improve their usefulness. Under the final rule, a company’s resolution  plan must have a public section that includes a high-level description of  the resolution strategy, information on material entities and core business  lines, and information helpful in understanding how the resolution plan  would be executed. According to FDIC officials, market participants  should be able to understand the progress, or lack of progress,  companies are making towards resolution from the public plans.
However, stakeholders generally did not find the initial public sections to  be useful. For example, nearly all nine of the academics and credit rating  agencies that we interviewed told us that the 2012 through 2014 public  sections were not informative—noting that the information was limited or  already publicly available in other sources. Similarly, a 2013 study  analyzing the 2012 public sections of the 11 Wave 1 filers found that the  public disclosures did not facilitate market discipline and, in some cases,  did not increase public understanding of the financial institution or its  business. In addition, most of the companies we interviewed had  received few or no comments from shareholders or creditors on their  resolution plan. In our review of transcripts from investor conferences  held by five of the Wave 1 and 2 filers between August 2014 and June  2015, we found that the companies generally did not discuss resolution  plans in their presentations, and three securities analysts raised  questions about the implementation status of resolution plans, indicating  that investors generally did not use the public sections of resolution plans  in their evaluations of these companies.
In a February 2015 written communication to the Wave 1 companies and  the Wave 2 company that filed in July 2015, the regulators jointly provided  new guidance that directed the companies to provide more detailed  information in their 2015 public plan sections. These areas included more  detail on each material entity, the strategy for resolving each material  entity in a manner that mitigates systemic risk, a high-level description of  what the company would look like following resolution, and the steps  taken to improve resolvability under the Code. After the release of the  2015 public plans, we followed up with stakeholders who had commented  on the previous public plans to obtain their views on the 2015 public  plans. Most of these stakeholders told us that the 2015 public plans were  an improvement over previous years’ plans but that additional information  would be helpful. For example, improvements included additional  information on a company’s organizational structure and intergroup  funding. Suggestions for improvement included adding a consolidated  balance sheet and having consistent components to facilitate analysis  across multiple companies. One Wave 1 company said that because the  2015 public portion of the plan contained more detailed information than  previous years, it was prepared for more questions from shareholders but  did not experience any increase in inquiries or comments about the plan.
FDIC performed a horizontal review of the July 2015 public plans to see  that they met the new requirements in the February 2015 joint  communication, according to FDIC officials. FDIC officials said that some  companies did a good job of showing items visually and that they planned  to capture best practices and give additional feedback for the next filing.  The officials told us that the regulators also directed the three foreign  Wave 2 companies and nonbank filers to disclose additional information  in the public sections of their December 2015 plans. However, they did  not give such instructions to Wave 3 companies.
In addition to their concerns about the public plan sections, several of the  20 stakeholders we interviewed raised concerns about the regulators’  lack of transparency about their review processes. As previously  discussed, the regulators have developed and revised their approaches  for analyzing and assessing the plans but have publicly disclosed limited  information about their reviews. Two academics whom we interviewed  told us that after the failure of financial regulators during the 2008  financial crisis, the public was being asked to put too much trust in the  regulators without any transparency. A bankruptcy attorney provided  another perspective on transparency and said that everyone would  benefit if the regulators were more transparent about their standards and  allowed the companies to talk among themselves to solve impediments to  resolution that were common to multiple companies.
FDIC and the Federal Reserve are considering publicly providing more  information about their resolution plan reviews. Federal Reserve officials  told us that while they were continuously evaluating the release of more  plan information into the public domain, they did not have a time frame for  reaching a decision on this issue. FDIC officials also told us that the  regulator was considering disclosing more information about its review  process but had not yet reached the point of sharing such information  with the public.
section_title: Resolution Plan Rule Imposes Costs on the Regulators and Companies
subsections: section_title: Regulator Costs
paragraphs: FDIC and the Federal Reserve have incurred costs in their annual review  of each company’s resolution plan but differ in the extent to which they  have tracked these costs. Staff resources are one of the most significant  costs. According to FDIC data, the regulator spent around $3.2 million,  $3.3 million, and $4.2 million on staff payroll related to resolution planning  in calendar years 2012, 2013, and 2014, respectively. As shown in  figure 5, FDIC incurred the highest average payroll cost per company in  2012 for activities related to Wave 1 filers, which generally are the largest  or most complex companies. Figure 5 also shows that FDIC’s average  payroll cost related to Wave 1 and 2 filers declined in the subsequent  year. However, as discussed above, FDIC (like the Federal Reserve) did  an abbreviated review of the Wave 1 filers’ 2014 plans, resulting in a  much lower average cost in 2014. FDIC officials told us that they  expected the resources required to review the resolution plans for Wave 1  companies to increase in 2015, because the plans contain more detailed  information to be reviewed, such as project plans. FDIC officials also told  us that the regulator assigned regional and division staff on a short-term  basis to review plans submitted by Wave 3 filers to reduce costs by  avoiding hiring additional staff.
In contrast, the Federal Reserve tracks the number of staff assigned to  review resolution plans but does not track staffing costs specific to  resolution plan review. According to Federal Reserve officials, instead of  having a dedicated staff working on resolution plan review, the regulator  enlists existing staff from various parts of the Federal Reserve System to  provide appropriate expertise. For its review of the 2015 plans submitted  by the 11 Wave 1 filers, the Federal Reserve assigned 144 staff. Of these  staff, 95 of them (66 percent) were from the Federal Reserve banks: 67  staff were from the Federal Reserve Bank of New York, and 28 staff were  from the Federal Reserve Banks of Boston, Chicago, Richmond, and San  Francisco. The remaining 49 staff were from the Federal Reserve Board.  Federal Reserve officials told us that staffing costs have been consistent  each year, but work hours have decreased as staff have become more  efficient at reviewing plans.
In addition to payroll costs, FDIC has incurred other costs related to  resolution planning. For example, in 2012 FDIC paid a consulting  company about $278,000, which FDIC officials said provided them with  insights on the obstacles and challenges that Lehman Brothers faced  during its bankruptcy. FDIC also incurred approximately $827,000,  $326,000, and $10,000 in travel costs in calendar year 2012, 2013, and  2014, respectively. FDIC incurred the majority of these travel costs in  connection to plans submitted by Wave 1 filers. The Federal Reserve did  not track travel costs specific to resolution plan review, but Federal  Reserve officials told us that travel costs had increased slightly because  they increased the number of meetings with Wave 1 companies in New  York City prior to the July 2015 filings.
section_title: Company Costs
paragraphs: All of the 25 companies we interviewed said that they had incurred  compliance and other costs to prepare their resolution plans, but they did  not measure costs the same way. Of the nine Wave 1, Wave 2, and  nonbank filers that provided us with estimates, the cost of preparing  resolution plans from 2012 through 2015 ranged from about $500,000 to  about $105 million per plan. However, these estimates varied significantly  because the companies used different approaches to estimate costs and  did not always include the same cost components in their estimates.  Officials from the Wave 1, Wave 2, and nonbank filers we interviewed  largely separated their resolution plan costs into two categories: (1)  internal staff and (2) external consultants and attorneys, with some filers  also including the costs of projects to enhance their resolution  capabilities. For the low-end cost estimate, the company provided us only  with data on the fees it paid to external consultants and attorneys. The  high-end estimate included the cost of internal staff, external consultants  and attorneys, and capabilities projects.
According to the Wave 1, Wave 2, and nonbank filers we interviewed,  preparation of the resolution plans requires considerable internal staff  resources. Most of these companies have created a team of full-time  employees dedicated to resolution planning—ranging from 3  professionals to 30 professionals. At the same time, many other staff from  across the company, such as business line managers and support  managers from legal, treasury, and technology departments and senior  management and board members, are involved in the preparation or  review of the plan. Several companies estimated that hundreds of  employees worked at least part-time on their resolution plan. The number  of work hours spent annually on resolution planning varied among the  companies providing an estimate—ranging from 55,000 work hours to  about 1 million work hours. The work hours varied, in part because like  the cost estimates, companies used different methods to estimate work  hours. For example, one company also included work hours for its  recovery and resolution plans in other countries in its estimate.
Nearly all of the Wave 1, Wave 2, and nonbank filers we interviewed had  hired outside consultants or attorneys to help them prepare their  resolution plans, but such costs varied across and within companies.  Several officials told us that they relied heavily on outside experts for their  initial plans, because they were unsure of how to comply with the rule or  did not have the in-house expertise. The amount of consulting or attorney  fees paid by the companies in a given year ranged from around $500,000  to $25 million. Two companies’ officials told us that their use of external  experts had decreased as their companies built up their in-house  expertise, but officials of another company told us that their company  spent more on external consultants for its 2015 plan because it was  undertaking major infrastructure initiatives.
According to most of the Wave 1, Wave 2, and nonbank filers we  interviewed, their resolution planning costs are increasing, in part  because of the projects they are undertaking to enhance their capabilities  to execute the resolution plan. As discussed, such projects include  enhancing collateral management reporting and management information  systems. For example, one company estimated that it spent about $50  million on capability enhancements and expected these costs to triple in  the next 2 to 3 years. Officials from two other companies also told us they  expected their internal staff or external costs to increase dramatically as  they implemented capability-enhancement projects.
According to officials from FDIC and the Federal Reserve, the regulators  have not considered actions to reduce the compliance costs for these  filers because companies make their own decisions on how to comply  with the resolution plan rule based on their structure. FDIC officials said  that the regulator was not requiring companies to choose a specific model  for responding to the rule. Federal Reserve officials said that resolution  planning was a substantial undertaking for many of these companies  because they had not considered resolvability before and did not have a  system in place to gather the relevant information. FDIC officials said  companies should have had some of these systems in place before the  2008 financial crisis, but the crisis revealed that they often did not.
According to most of the Wave 1, Wave 2, and nonbank filers we  interviewed, the resources devoted to resolution planning have had an  opportunity cost but have not yet had a clearly measurable effect on their  business or competitiveness. Half of these companies said that while it  was too soon to know whether the resolution plan requirement would  have any negative effects on their competitiveness, they were concerned  about that potential impact. In contrast, two other companies said that  compliance did not put them at a disadvantage, with one explaining that  its competitors had the same requirements. Additionally, most of these  companies said that they had not had to make many, if any, cost  adjustments in other areas due to resolution planning. For example, one  Wave 1 filer stated that resolution plan costs are not a large percentage  expense for the company overall, representing approximately 2 percent of  its initiative budget. Nearly all said that complying with the resolution plan  rule was on par with or less costly than other prudential regulations, such  as the Comprehensive Capital Analysis and Review (stress testing),  Basel III capital requirements, and Volcker rule.
Of the 13 Wave 3 filers that provided us with cost estimates, the cost of  preparing their initial resolution plan varied widely. Four companies  estimated that they spent less than $400,000 to prepare their initial  tailored plans, with two estimating their costs to be $35,000 and $15,000.  For the other companies that provided estimates, their costs ranged from  about $1 million to about $6 million, with no consistent difference between  companies filing a full or tailored plan. Like the larger filers, nearly all of  these Wave 3 filers hired external consultants or attorneys to help them  prepare their initial plans, with total fees ranging from $15,000 to $3.5  million. But nearly all told us that they reduced their use of external  experts for their subsequent plans and that the cost of preparing their  subsequent plans declined. Additionally, the number of internal work  hours associated with resolution planning varied considerably among the  Wave 3 companies. Of the companies that provided estimates, two  estimated over 10,000 work hours, three estimated 1,000 to 6,000 work  hours, and four estimated less than 1,000 work hours to complete the  resolution plan. Cost estimates varied, in part because companies used  different approaches to measure costs.
Similar to the larger companies, several of the Wave 3 filers we  interviewed said that the time and resources dedicated to resolution  planning represent an opportunity cost. Without the resolution plan  requirement, the companies could expend these resources and staff time  on revenue-generating activities, according to the companies. However,  most of these companies said that resolution planning had not had a  measurable effect on their business or competitiveness, and several said  that they generally had not made cost adjustments in other areas due to  resolution planning. In comparison to other regulations, several of the  Wave 3 companies said that complying with the resolution plan rule was  on par with or less costly than the Comprehensive Capital Analysis and  Review (stress testing), Basel III capital requirements, and the Volcker  rule.
According to Federal Reserve officials, the regulators helped to reduce  the burden on these companies by giving some the option of filing tailored  plans and exempting others from most of the informational requirements.  As previously mentioned, the regulators have exempted 90 Wave 3 filers  from most plan information requirements. However, FDIC officials said  that this exemption was related more closely to the companies’ lower  levels of complexity and effect on U.S. financial stability than it was to  reducing the companies’ costs. The regulators are considering ways to  reduce compliance costs for these filers while still obtaining the necessary  information, according to officials from both FDIC and the Federal  Reserve.
section_title: Conclusions
paragraphs: FDIC and the Federal Reserve have made progress implementing the  Dodd-Frank Act’s framework for resolution planning for large financial  institutions. For the smaller financial companies, the regulators have  taken steps to reduce the burden of planning under the resolution plan  rule, including by significantly reducing the plan informational  requirements for the majority of such filers. However, weaknesses remain  in the following areas:
Disclosure and transparency. The regulators have not disclosed  their assessment frameworks and criteria for confidentiality reasons,  which limits the potential for companies to better achieve the Dodd- Frank Act’s objective. For example, a better understanding of the  regulators’ assessment frameworks could give the larger companies a  more complete understanding of the key factors that can lead to plan  deficiencies. Likewise, disclosure of the regulators’ criteria could help  motivate smaller companies to reduce their systemic risk and  understand how they might qualify to file reduced plans. Greater  disclosure and transparency also could enhance the accountability of  the regulators’ decisions by, among other things, better informing the  public on how the regulators are assessing resolution plans and  reducing plan requirements for smaller companies, thereby bolstering  public and market confidence.
Timeliness of guidance and feedback. FDIC and the Federal  Reserve have taken about 9 months on average to review resolution  plans and jointly provide companies with guidance or feedback.  Because the resolution plan rule requires companies to file plans  annually, some companies may not have sufficient time to fully  incorporate such guidance or feedback into their subsequent plans  and obtain their board of directors’ approval of the plans by the  submission deadline. For example, some companies completed and  submitted their 2014 plans before receiving the regulators’ feedback  on their previous year’s plans, resulting in a less effective and efficient  use of time and resources for both the companies and the regulators.
section_title: Recommendations for Executive Action
paragraphs: We are making the following three recommendations:  To enhance disclosure and strengthen transparency and accountability,  FDIC and the Federal Reserve should take the following actions:
Publicly disclose information about their respective frameworks for  assessing and recommending to their boards whether a plan is not  credible or would not facilitate an orderly resolution under the Code.  For example, the regulators could disclose aspects of their  assessment frameworks as a supplement to their initial guidance  publicly issued in April 2013.
Publicly disclose aspects of their criteria used to decide which Wave 3  companies are allowed to file a reduced plan.
In addition, to strengthen the efficiency and effectiveness of resolution  planning, FDIC and the Federal Reserve should revise the resolution plan  rule’s annual filing requirement to provide sufficient time not only for the  regulators to complete their plan reviews and provide feedback but also  for companies to address and incorporate regulators’ feedback in  subsequent plan filings. For example, the regulators could extend the  annual filing cycle to every 2 years or provide companies at least 6  months from the date of feedback or guidance to file another plan.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FDIC and the Federal Reserve for  review and comment. In their joint written comments (reproduced in  appendix II), the regulators concurred with our findings and  recommendations regarding transparency and timeliness. They stated  that they are committed to enhancing public disclosure around resolution  planning and plan to make public the information needed to understand  their frameworks. They also stated that they intend to work to find the  most appropriate way to ensure that sufficient time is provided for the  regulators to complete their reviews and for plan filers to incorporate the  regulators’ feedback in their subsequent plan filings. FDIC and the  Federal Reserve also provided technical comments on the draft report,  which we incorporated as appropriate.
We are sending copies of this report to the House Committee on  Financial Services, FDIC, and the Federal Reserve. In addition, the report  is available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) the processes used by the Federal  Deposit Insurance Corporation (FDIC) and Board of Governors of the  Federal Reserve System (Federal Reserve) (jointly, the regulators) to  review resolution plans; (2) the extent to which the regulators have  determined whether resolution plans are not credible or would not  facilitate an orderly resolution under the Bankruptcy Code; and (3)  stakeholder views on the usefulness of the resolution plans to companies  and other stakeholders.
To examine the process used by the regulators to review resolution plans  and the extent to which the regulators have determined whether  resolution plans are not credible or would not facilitate an orderly  resolution under the Code, we reviewed Section 165(d) of the Dodd- Frank Wall Street Reform and Consumer Protection Act, the final  resolution plan rule, and FDIC’s and the Federal Reserve’s policies and  procedures. We analyzed the regulators’ internal guidance, training  documents, and workpapers related to plan reviews conducted for plan  years 2012 through 2014, guidance and feedback provided to the  companies, and FDIC’s and the Federal Reserve’s Board meeting  minutes where credibility determinations were discussed.
To examine what is known about the usefulness of the resolution plans to  companies and other stakeholders, we selected a sample of 25  companies that filed a resolution plan in 2014 and interviewed them to  obtain their views on the benefits, costs, and challenges associated with  the plans. We selected 10 of these companies from the 18 Wave 1, Wave  2, and designated nonbank filers, and 15 from the 120 Wave 3 filers. We  grouped the Wave 1, Wave 2, and designated nonbank filers together  because they generally represent the largest filers and FDIC and the  Federal Reserve generally use the same processes for reviewing these  companies’ plans. From this group, we systematically selected and  attempted to contact 10 filers. We were able to conduct interviews with 9  of these companies, and we supplemented the sample with 1 additional  filer that had been interviewed prior to the sample selection. For the Wave  3 filers, FDIC provided us with a breakdown of the companies by the type  of plan they were allowed to file in 2014: (1) 30 companies that filed a full  resolution plan, (2) 30 companies that were approved to file a tailored  plan, and (3) 60 companies that were approved to file a reduced plan.  Within these categories, we randomly selected 4 full plan filers, 3 tailored  plan filers, and 3 reduced plan filers. In two cases, officials from the  sampled company declined to participate, so we randomly selected a  substitute from the same plan type category. We also supplemented the  sample of Wave 3 filers with 1 full plan filer and 3 tailored plan filers that  had been interviewed prior to the sample selection and 1 full plan filer that  requested to be included for a total sample of 15 Wave 3 filers. The  information collected from this sample of companies cannot be  generalized to the larger population of all companies that are required to  file a resolution plan. These interviews were also used in our analysis for  the second objective.
In addition, we judgmentally selected a sample of 20 stakeholders that we  interviewed to obtain their views on the usefulness of the resolution plans.  We selected stakeholders who (1) had subject matter expertise, such as  academics and industry groups; (2) had experience advising companies  on their resolution plans, such as bankruptcy attorneys and consultants;  or (3) used the plans in their work, such as credit ratings agencies,  investors, and creditors. To characterize companies’ and stakeholders’  views throughout the report, we consistently defined modifiers (e.g.  “nearly all”) to quantify each group of interviewees’ views as follows: “all”  represents 100 percent of the group, “nearly all” represents 80 percent to  99 percent of the group, “most” represents 60 percent to 79 percent of the  group, “several” represents 40 percent to 59 percent of the group, and  “some” represents 20 percent to 39 percent of the group. While the  percentage of the group of interviews remains consistent, the number of  interviews each modifier represents differs based on the number of  interviews in that grouping: 10 Wave 1, Wave 2, and designated nonbank  filers; 15 Wave 3 filers; and 20 stakeholders. Table 6 provides the number  of interviews in each modifier for each group of interviews.
Furthermore, we met with officials from the Securities and Exchange  Commission, the Securities Investor Protection Corporation, the National  Association of Insurance Commissioners, and two state insurance  departments about their involvement with resolution plan reviews. We  also analyzed the 2015 public plans of all Wave 1 filers and 1 Wave 2 filer  and the 2014 public plans of all Wave 3 filers and 2 designated nonbank  filers, and reviewed government, academic, and other studies on  resolution plans’ implementation and usefulness.
For our discussion of the extent to which filers have the potential to  adversely affect the financial system or the broader economy if they  become distressed, we used data from Bloomberg and the Federal  Reserve as of the second quarter of 2015 to construct indicators of filers’  size, interconnectedness, and complexity. Our indicator of size is a filer’s  total assets. Our indicators of interconnectedness are the gross notional  amounts of credit default swaps outstanding for which a filer is the  reference entity and a filer’s total debt outstanding, excluding deposits.  Our indicators of complexity are the number of a filer’s legal entities, the  number of a filer’s foreign legal entities, and the number of foreign  countries in which a filer’s foreign legal entities are located. We then  compared the median values of the indicators for domestic Wave 1 and 2  filers to the median values for domestic Wave 3 filers. We assessed the  reliability of the data from Bloomberg for the purpose of constructing our  indicators of size and interconnectedness by reviewing relevant  documentation and by electronically testing the data for outliers, missing  values, and obvious errors, and we found them to be sufficiently reliable  for this purpose. We assessed the reliability of data from the Federal  Reserve for the purpose of constructing our indicators of complexity by  corresponding with Federal Reserve officials, and we found them to be  sufficiently reliable for this purpose.
For our analysis of FDIC’s payroll expense data, we connected the  companies for which FDIC reported resolution planning-related expenses  with the parent companies that are required to file resolution plans under  Section 165(d) of the Dodd-Frank Act. We then sorted the parent  companies by filing wave to identify the average, minimum, and maximum  payroll costs that FDIC staff incurred for each filing wave by calendar year  (2012 through 2014). FDIC’s data included 11 Wave 1 filers that filed their  first plans in July 2012, 4 Wave 2 filers that filed their first plans in July  2013, 108 Wave 3 filers that filed their first plans in December 2013, and  3 nonbank filers that filed their first plans in July 2014. According to FDIC  officials, the absence of the remaining 8 of 116 Wave 3 filers from  December 2013 indicates that not all activities had been properly coded.  We excluded expenses for companies that did not file a 165(d) resolution  plan. Despite FDIC’s acknowledgment of some minor coding errors, we  believe our use of the data provides a reasonably accurate estimate to  illustrate the trends in the regulator’s spending on resolution plans.
In addition, we met with officials from the offices of the FDIC and Federal  Reserve that are responsible for reviewing resolution plans, including  FDIC’s Office of Complex Financial Institutions and Division of Risk  Management Supervision, the Federal Reserve’s Division of Banking  Supervision and Regulation, and the Federal Reserve Bank of New York.  We discussed their policies and procedures related to plan reviews as  well as their views on plans’ usefulness.
We conducted this performance audit from November 2014 to April 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Richard Tsuhara (Assistant  Director), Lisa Reynolds (Analyst-in-Charge), Nancy Barry, Katherine  Carter, Emily Chalmers, William Chatlos, Risto Laboski, Courtney  LaFountain, Kun-Fang Lee, Jessica Sandler, and Jena Sinkfield made  significant contributions to this report.