September 17th, 2012
Perhaps the Lehman bankruptcy 4 years ago this past weekend spurred that now we’re seeing in federal statute the mandate for FDIC resolution and perhaps supervision authority over nonbanking units and organizational structures which also are intertwined with insured depository institutions.
Federal Statute in the past gave the FDIC and the Comptroller of the Currency (“OCC”) or State banking departments responsibility for depository institutions ie, the banks and savings banks they regulated. Bank Holding Companies (“BHCs”), which are the ‘Parent’ in the consolidated enterprise, were and are supervised and were examined by the Federal Reserve System’s District Banks. Whereas according to federal statute, the FDIC and/or the OCC or State Banking Department (in the case of a state chartered bank) could take over or begin the process of resolving a bank that was in danger of, or actually failing by depleting its capital or reaching a stage of illiquidity, ie, it can’t service its daily banking needs, with regard to the BHC parent – this part of the organization went into bankruptcy. There were cases when the subsidiary financial institutions were still relatively ‘healthy’ enough to operate after the parent BHC was forced into, or declared bankruptcy.
The Dodd-Frank Act (“DFA”) arguably changed things with regard to putting into federal statute, the requirement for SIFIs to file Resolution Plans. The FDIC also has more power for latitude over the consolidated enterprise –the entire SIFI – rather than only on the insured depository institutions under the Parent. DFA also established the Orderly Liquidation Authority and a fund of approximately $50 Billion to enable the FDIC and Fed to ‘unwind’ a SIFI in the event the FDIC, the Fed, the Systemic Risk Advisory Council, and multi-lateral interests decide to go that route.
Moreover, to ease the burden of this requirement the regulators are permitting Resolution Plans/Living Wills filings to leverage on top of material financial information the Covered Companies previously provided for 10Ks and 10Qs as well as Sarbanes-Oxley Act 2002 (“SOX”) filings on the internal audit and systems that produce the 10K and 10Q.
Similar to a ‘business/capital plan’ that in the past a financial institution in distressed condition had to file, the Resolution Plan also would describe how management would solve any substantial problem(s) they may have, divest of sub(s), or ‘unwind’ their enterprises under specialized insolvency codes such as the Federal Deposit Insurance Act for banks, the Bankruptcy Code for non financial units, and state insolvency regimes for insurance units, while the Securities Investor Protection Act will apply to broker/dealers.
Among other extensive matters, the Resolution Plan must also include comprehensive discussion on the nature and extent of large credit exposures of other large financial counterparties and in turn, their own large exposures to those companies. Filers also have to report large credit exposures of their own, and those large exposures of very large nonfinancial counterparties.
This Regulatory Filing potentially presents a challenge to management’s interest as a going concern. Other than what the Regulators permit as Exemptions, if the regulators’ requirements are not met within expected timeframes, this could trigger potentially dire consequences for management. As it were, filers have been relying on legal firms to interpret the meaning of regulators’ language, and in case if having to experience more heightened dialog with the regulators and other bodies with which the regulators are involved.
CMA understands that often our clients’ biggest concern is ‘protection’. We agree. Although the regulators are attempting to catalogue as much as possible, our clients’ want their best interests protected, even with the confidential portions of these Plans. CMA recognizes the need for a thorough, comprehensive Plan that describes clients’ interests while also addressing regulatory concerns, expectations, and satisfying the associated regulatory framework, specialized insolvency regimes, and bankruptcy code as are applicable. Ideally, managements running healthy enterprises presumably would satisfy the shareholders as well as the regulators. Although that may be difficult in a constrained economy in which we’ve been, management had had a pattern of successfully running their banks when healthy. Stability can’t frown on that and the Regulators are said to want stability.
CMA provides experienced and highly skilled professionals who coordinate effectively with the board, senior management, and throughout the organization. CMA Professionals could manage and coordinate, or assume the role if established of the recommended Central Planning Function, as well as interact with the regulators.
