The FDIC recently finalized its resolution planning rule for large banks, which becomes effective October 1, 2024. Resolution plans, or "living wills," are plans to wind down operations in the event of bank failures. The current rule requires covered insured depository institutions (CIDIs) with $50 billion or more in total assets to periodically submit resolution plans to the FDIC. The FDIC has made key changes based on its experience with the filings over the last decade generally and the 2023 spring bank failures specifically.

The changes are important for all CIDIs. But we particularly note that this is an important juncture and substantial undertaking for CIDIs with $50 billion to $100 billion that are either filing for the first time or have not made a filing in many years. These banks would benefit from careful coordination internally and cooperation with the FDIC. They should anticipate a considerable amount of work on a sustained basis for dedicated personnel and resources covering a broader range of entities, affiliates, and services.

In addition, the OCC has proposed changes to its recovery plan guidelines for OCC-regulated banks—a separate obligation for some banks. Please contact us if your institution needs help with resolution or recovery planning. This alert explores both topics.

Key Takeaways

• The FDIC final rule on resolution planning separates CIDIs based on total asset size into two groups. Group A consists of insured depository institutions ("banks") with $100 billion or more in total assets. Group B consists of CIDIs with at least $50 billion in total assets but less than $100 billion. This exercise will be new and substantial (see our previous alert's attachment) for many Group B CIDIs. Banks with less than $50 billion are not generally covered by the rule.
• Group A CIDIs have to submit an "Identified Strategy" to serve as a default plan for handling a resolution event. Group B CIDIs do not.
• The "Credibility Standard" is broken into two prongs, with the first providing criteria for reviewing Group A Identified Strategies and the second for evaluating the quality of submissions for both Group A and Group B CIDIs.
• While the reporting requirements for Group B are less involved than those for Group A, they are still rather substantial.
• The FDIC revised its spectrum for identifying issues in submissions. Weaknesses range in severity from an "informal observation" to "significant findings" (a new intermediate category) and "material weaknesses."
• Most CIDIs must submit a resolution plan every three years, with supplements due in the off years. This is a change from the proposal, which would have required submissions every two years.
• "Engagement and Capabilities Testing" will be a key component of resolution planning for Group B CIDIs, and most are expected to be subject to it each cycle.
• The approval of the board of directors is required for the submission, which may involve board education and, ultimately, will entail board oversight of the actions of management and staff.
• The OCC also recently proposed changes to its recovery plan guidelines, which would lower the total asset threshold to $100 billion, reserving discretion to include OCC-regulated banks with less if they are highly complex or high risk. The proposal addresses testing and risk management requirements, with an emphasis on addressing non-financial risk.

Covered CIDIs—Groups A and B

The final rule separates CIDIs into two groups based on total asset size. The first group, Group A, consists of banks with $100 billion or more in total assets. These CIDIs are required to periodically submit detailed resolution plans to the FDIC. The second group, Group B, consists of banks with at least $50 billion but less than $100 billion in total assets. Group B CIDIs have to submit an "informational filing" that, while limited to a subset of the information required by Group A, still involves a serious undertaking.

The final rule consists largely of elements that the FDIC proposed last fall, though changes were made to certain aspects, most notably the timing of submissions. The key components and criteria for submissions are discussed below.

At a high level, banks under $50 billion in total assets are not covered by the FDIC's final rule.

Identified Strategy

Consistent with the proposed rule—and a notable shift—Group A CIDIs must submit an "Identified Strategy" for dealing with a resolution event, which describes the resolution from the point of failure through the sale or disposition of the Group A CIDI's franchise (including all of its core business lines and all other business segments, branches, and assets that constitute the CIDI and its businesses as a whole) in a manner that meets the credibility standard. These plans include the establishment of a bridge bank by default (exit strategy required) or alternative strategies, if justified. The FDIC will likely use the Identified Strategy as the default approach, should the CIDI fail.

Notably, Group A CIDIs cannot submit a "closing weekend sale" as the Identified Strategy under the final rule. The FDIC explained that while this type of sale is the least risky and most efficient, it may not be possible for Group A CIDIs because of their complex nature and the short time frame inherent to a closing weekend sale. However, Group A CIDIs are still required to address certain informational elements necessary for a weekend sale.

Group B CIDIs need not submit an Identified Strategy in their informational filings. While Group B CIDIs may be considered large and complex, the FDIC noted that they are less so than Group A CIDIs, and this increases the likelihood of a sale because of the larger purchaser pool.

Credibility Standard and Capabilities Testing

The final rule updates the so-called Credibility Standard with a two-prong approach. The first prong provides the FDIC the criteria to evaluate the strategy proposed by Group A CIDIs. Under this prong, the Identified Strategy should ensure timely access to insured deposits, maximize the value from a sale of assets, minimize losses to creditors of the CIDI in resolution, and address the potential risks of adverse effects of U.S. economic conditions or financial stability.

The second prong provides the criteria to evaluate the quality of the information and analysis provided by both Group A and Group B CIDIs. Under this prong, a full resolution submission should include information and analysis supported with observable and verifiable capabilities and data and reasonable projections, and the CIDI should comply in all material respects with the requirements of the rule.

The FDIC may require, at its discretion, any CIDI to demonstrate the CIDI's capabilities described, or required to be described, in the full resolution submission, including the ability to provide the information, data, and analysis underlying the full resolution submission.

Because informational filings by Group B CIDIs do not include the development of an Identified Strategy and other elements of a resolution plan, the FDIC expects the engagement and capabilities testing with Group B CIDIs will be a key component of its resolution planning and expects to conduct engagement and capabilities testing with most Group B CIDIs in each cycle.

Under the final rule, the FDIC reviews the submissions for issues and weaknesses. The feedback on weaknesses ranges in severity from an "informal observation" to "significant findings" and "material weaknesses." A material weakness requires corrective action by the CIDI. Entities that do not address material weaknesses in a timely fashion may be subject to enforcement actions—a new clarification that is consistent with the FDIC's approach following the 2023 spring bank failures (for instance, the FDIC's corporate governance guidelines would also be enforceable and were expressly explained as such in the preamble to that proposal).

A significant finding is a weakness or gap that raises questions about the credibility of a CIDI's full resolution submission but does not rise to the level of a material weakness. If a significant finding is not satisfactorily explained or addressed before or in the CIDI's next full resolution submission, it may be found to be a material weakness in the CIDI's next full resolution submission.

Submission Time Frame

The submission time frame for most CIDIs is every three years, compared with the initially proposed two years. Smaller, interim supplements are due in the off years. However, CIDIs that are affiliates of U.S. global systemically important banking organizations (or GSIBs) must submit plans every two years, with interim supplements in the off year, unless they file a full or targeted Dodd-Frank resolution plan.

The FDIC expanded the submission time frame after considering the comments on the proposal and recognizing that the longer time frame permits a more complete review and the opportunity for engagement and feedback.

OCC Proposed Changes to Its Recovery Plan Guidelines

A few days after the FDIC issued the final rule on resolution plans, the OCC released proposed amendments to its recovery plan guidelines. These guidelines pertain generally to insured national banks, federal savings associations, and federal branches ("OCC-regulated banks"). OCC-regulated banks that meet the respective total asset thresholds would have to comply with both the FDIC's final rule on resolution planning and the OCC's proposed guidelines for recovery plans.

The proposed OCC guidelines would apply to banks with $100 billion or more in total assets, with discretion to include OCC-regulated banks under the threshold if they are highly complex or high risk. A large portion of the suggested amendments relate to testing. An OCC-regulated bank should test its recovery plan at least annually to ensure its effectiveness during difficult periods. The proposed guidelines do not include a specific format for testing but noted the focus should be on managing risk proportional to the bank's size and complexity.

Importantly, the testing and plans should also consider non-financial risks, including operational and strategic risks. The OCC recognized that while monitoring financial risk is important, non-financial risks should not be overlooked, and has found in its review that banks apply an "inconsistent approach to non-financial risk."

The amendments would bring the guidelines closer to the original threshold of $50 billion or more in total assets back from $250 billion, consistent with the general anti-tailoring trend. The OCC noted that the changes in this proposal are based on the 2023 spring bank failures. Those failures involved several non-OCC-regulated banks with between $100 billion and $250 billion in total assets.

OCC-regulated banks covered by the current guidelines would have 12 months from the effective date of the proposal to comply with the changes. Newly covered banks would have 12 months from the effective date to submit recovery plans and 18 months to comply with the testing criteria.

The OCC's proposed changes to its guidelines noted the FDIC proposed rule on resolution planning but did not reference the final rule. It is possible the final OCC changes will specifically reference and in other ways align with the final FDIC rule on resolution planning. Comments to this proposal are due August 3, 2024.