The US Federal Reserve Board and Federal Deposit Insurance Corporation (FDIC) jointly finalised a major rule aimed at solving the core policy conundrum in the 2008 financial crisis: that of banks and other financial concerns being ‘too big to fail.’ The ‘Living Will’ rule requires a financial company with $50 billion or more in assets to map out a plan for its ‘rapid and orderly resolution’ should it ever suffer ‘material financial distress.’ The plans must not assume ‘that the United States or any other government will provide the covered company funding or capital other than in the ordinary course of business.’
The rule’s definition of ‘rapid and orderly’ does not specify a time frame. But given the speed at which the failure of Lehman Brothers crashed the financial system, presumably these plans must be able to be executed very swiftly.
The biggest and most systemically risky companies — those with $250 billion in assets — must file their plans by July 1, 2012 and must update them annually. Other companies have until July 1, 2013, and the deadline for the smallest covered companies have until is December 31, 2013. Foreign assets count toward the asset thresholds but a foreign company with mostly foreign assets may file a relatively limited resolution plan.
In finalising the rule, the board and FDIC dropped the requirement that resolution plans detail the companies’ credit exposures to other significant financial companies. Although the Fed and FDIC note such counterparty risk information is crucial to effective resolution planning, the regulators decided that the information should come as part of a different reporting rule, one that is still being developed.
A robust resolution plan will include sensitive, proprietary information. For example, a company’s resolution plan must ‘map its core business lines and critical operations to material legal entities and provide integrated analyses of its corporate structure; credit and other exposures; funding, capital and cash flows; the domestic and foreign jurisdictions in which it operates; and its supporting information systems for core business lines and critical operations,’ among other things. As a result, the rule requires calls for two plan versions: a summary public one and a detailed, confidential version. However, if a Freedom of Information Act request is made for the plan, the confidential section will be formally reviewed and released in line with that law.
Despite the detailed nature of a resolution plan, it is context limited. The plan’s terms are not binding in other resolution forums such as a bankruptcy court. Similarly, individuals have no right to sue in relation to the plan.
But the real question is whether or not the new rule will prevent another ‘too big to fail’ bailout. That remains to be seen.
[Article by Abigail Caplovitz Field, Corporate Secretary]