The Federal Reverse System (Fed) and the Federal Deposit Insurance Corporation (FDIC) have released a proposed rule that would require large banks and financial institutions with at least $50 billion in assets to submit annual resolution plans and quarterly credit exposure reports detailing their exposures and methods for responding to a financial crisis.
As a component of the Dodd-Frank Act, the rule would require that large institutions present a plan for "rapid and orderly resolution in the event of material financial distress or failure," essentially stating how a firm could move quickly through bankruptcy if financial conditions warranted it. Additionally, firms must include a report on "the nature and extent of credit exposures of such company to significant bank holding companies and significant nonbank financial companies and the nature and extent of the credit exposures of significant bank holding companies and significant nonbank financial companies to such company."
According to the announcement the rule is intended to provide advanced details as to how an institution would respond to a financial crisis and manage their credit exposure in order to not pose a systemic risk to the financial system. The rule provides detailed requirements for the analysis and information that must be included in the Resolution Plan. The plan would be required to include: "an executive summary, a strategic analysis of the plan’s components, a description of the Covered Company’s corporate governance structure for resolution planning, information regarding the Covered Company’s overall organizational structure and related information, information regarding the Covered Company’s management information systems, a description of interconnections and interdependencies among the Covered Company and its material entities, and supervisory and regulatory information."
The Credit Exposure Report component requires companies to submit reports on a quarterly basis on the nature and extent of credit exposures of the company. This effort will be coordinated with other initiatives under the Dodd-Frank Act, including the Fed's single counterparty credit exposure limits and stress testing responsibilities.
The rule acknowledges that for "the largest and most complex companies," they may need to establish "a central planning function," or dedicated department with the sole function of complying with this rule.
Should the Fed or FDIC determine that a companies Resolution Plan is insufficient, under the rule they have the ability to require a company to cure deficiencies within a period not to exceed 90 days. Failure to cure deficiencies provides the agencies the ability to set more stringent capital, leverage or liquidity requirements for the company. The increased restrictions would provide the company a two year period to cure deficiencies. If the company does not, then the agencies can require a company to divest the assets or operations deemed to be deficient.
Parties interested in commenting on the rule must submit comments by June 10, 2011.