Resolution planning: Bail-in debt rule slowly taking form

October 2013
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Resolution planning: Bail-in debt rule slowly taking form

At a glance

A bail-in debt proposal is expected from US regulators in the coming months.

More than 100 financial companies are deep in the throes of completing their first annual resolution plans (due in December), while those with the most US nonbank assets are anxiously awaiting regulators’ response to their submissions from earlier this year. If the Federal Reserve (“FRB”) and the FDIC do not find the companies’ resolution plans credible, they hold significant powers to force change either through increased capital or liquidity requirements or, in the extreme, corporate restructurings and divestitures.

As a result, resolution planning already has the attention of the thousands of people on whose shoulders the construction of these plans rest. Beyond them, there are as many regulators and industry watchers who fully appreciate the gravity of resolution planning and its potential to dramatically influence the ever-changing financial landscape.

It therefore comes as no surprise that the FRB’s and Federal Reserve Bank of Richmond’s jointly-sponsored conference on resolution planning on October 18th received wide attendance and participation. The invitation-only event focused on Category 1 and Category 2 plan filers (i.e., those with US nonbank assets of at least $100 billion and global assets of at least $50 billion (“US-SIFIs”)) in a discussion of industry-wide challenges for the orderly resolution of large and complex financial institutions under the Dodd-Frank Act. Its purpose was to “stimulate constructive dialogue among knowledgeable professionals and the practitioners involved in constructing and assessing resolution plans.” Participants included not just regulators and the regulated, but also other members of industry including lawyers, consultants, rating agencies, buy-side investors, and think tanks.

In our view, the high level takeaways from the event are the following:

  • Universal agreement exists that a Title I resolution of a US-SIFI would still be quite challenging.
  • Nonetheless, the single point-of-entry model (“SPOE”) is gaining traction as a Title I resolution approach.
  • Important issues remain unresolved in order for a Title I SPOE to be successfully executed, including both legal issues and the need for sources of private sector capital and liquidity (widely expected to be addressed in future proposals for minimum “bail-in” debt).
  • The impact of SPOE and possible associated requirements on investors and US-SIFIs have yet to be addressed.

This Financial Services Regulatory Brief details each of these key points.

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