Preparing Living Wills for Bank Holding Companies and Depository Institutions: An Update

In November 2011, the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) adopted regulations requiring U.S. bank holding companies with consolidated assets exceeding $50 billion to provide a resolution plan—commonly being referred to as a “living will.”

Because the asset tier structuring determines when a bank holding company (and possibly, its subsidiary bank(s)) must submit a living will, covered holding companies are required to submit their living wills on July 1, 2013 or December 31, 2013. (The largest bank holding companies have previously submitted their living wills on July 1, 2012.)

Living Will Requirements

Living wills require extensive and detailed disclosure of a covered holding company’s structure and operations, with emphasis being placed on providing an analysis of the means by which the non-banking assets would either be recapitalized or else resolved under the federal Bankruptcy Code and the bank receivership provisions of the Federal Deposit Insurance Act. (Several other specialized U.S. insolvency laws may also be implicated.) In addition, for covered companies operating on an international basis, a discussion of the applicability of the receivership/insolvency laws in other jurisdictions may also be required.

The FRB and the FDIC have learned from their initial review of the living wills submitted by the largest holding companies in July 2012 that the exercise of preparing a living will is useful not only because it provides a clear path to resolve an insolvent holding company and/or insured depository institution, but also because it provides both the U.S. regulators and the covered holding company or bank with a structured approach at the corporate level for resolving an insolvent financial entity based upon the legal structure rather than the cross-corporate operations of the enterprise as a whole.

Specifically, bank holding companies generally operate based upon the implementation of business goals and not upon corporate structures and similar formalities. The “mapping” process envisioned by a living will permits the FRB and the FDIC to understand how the enterprise function can best be preserved by analyzing and determining how to preserve functionality across corporate members of an affiliated group that would be affected by the various insolvency regimes, should some or all members of a holding company family fail.

As noted above, the FDIC and the FRB have come to understand that the living will exercise is an iterative, ongoing process that will reoccur each year—with the announced intention that each year the level and quality of analysis will continually improve. (Of course, as the domestic and global financial system experiences or identifies new risks of loss, it is probable that at the time of each annual review of a holding company’s living will, the FRB or FDIC may require a new or different analysis be employed to enhance the value of the previous year’s living will analysis.)

The submission of living wills for the largest banking organizations has resulted in two broad categories that the FRB and the FDIC require submitting organizations to address: The first is a recovery plan for a holding company family that may be in danger of failing but may recover, such as by obtaining additional capital, selling of assets or lines of business, etc. The second category is a resolution plan, which presents a coherent, organized pathway to liquidate or rehabilitate some or all corporate components of a holding company family that has failed and cannot continue to be operated except by utilizing the various applicable insolvency laws.

Download: Preparing Living Wills for Bank Holding Companies and Depository Institutions: An Update