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Resolution Plans and Resolution Strategies: Do They Make G-SIBs Resolvable and Avoid Ring Fence?

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Abstract

The paper analyses the public section of the 2015, 2016 and 2017 resolution plans of the eight largest US Global Systemically Important Banks (G-SIBs). It unfolds the beneficial effects that the statutory obligation to draft such plans had on the rationalisation of groups’ structure and on US G-SIBs insolvency preparedness. However, the detailed analysis of those plans also shows how banks have almost uniformly chosen a Single Point of Entry (SPOE) resolution strategy which may not be rapid and orderly and may not be the most effective strategy overall given the location and the type of entities covered. This leads the author to argue that the choice of an SPOE may be the preferred option of the relevant US Agencies, leading to a phenomenon of ‘regulatees’ capture’. The paper also shows how in case of insolvency of a US based G-SIB with entities located in the EU, tensions may arise with the relevant EU authorities. This is mainly because of the uncertainty driven: by non-uniform triggering events; by the existence of two types of resolution plans in the US; by the over-reliance on pre-positioned loss absorbing capital at group level (which may not overcome the double leverage problem); by deficiencies in US law to deal with the liquidation of G-SIBs under an SPOE; and by a possibly different regulatory culture in the US and the EU which may afford dissimilar degrees of protection to bank stakeholders.

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Notes

  1. Basel Committee on Banking Supervision (2010).

  2. See Financial Stability Board (2011).

  3. The introduction of recovery and resolution planning is seen as a ‘good illustration of forward-looking risk based supervision from both a macro prudential and a micro-prudential perspective’ and as a supplement of ‘risk-based supervision in a number of ways’. See Singh (2016), paras. 1.52 and 1.54.

  4. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institution and investment firms and amending Council Directive 82/891/EEC and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council [2014] OJ L 173/90.

  5. Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July 2015 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No. 1093/2010 [2014] OJ 2014 L 225/1.

  6. 12 Code of Federal Regulations (CFR) Part 243 and 12 CFR Part 381 (discussed in the next sections as Regulation QQ).

  7. These will be covered in details in the next sections.

  8. A lower degree of harmonisation at international level can be observed on bank insolvency laws instead.

  9. Only after taking resolution action against Banco Popular, the Single Resolution Board (SRB) made public a non-confidential version of the group resolution plan. See Banco Popular (2016).

  10. At the time of writing, Europe appears to lag behind resolution preparedness whereas greater progress has been made in the area of recovery planning, mostly due to the work of the European Banking Authority. This was also noted in a report by the European Court of Auditors, which acknowledged the area of resolution plans being ‘still very much a work in progress’. See European Court of Auditors (2017). However, in the 2017 work programme of the Single Resolution Board priority is given to the following areas, among the others: the operationalisation of resolution strategies; the execution of bail-in; the identification of obstacles to resolvability; minimum requirement for own funds and eligible liabilities (MREL) analysis; the continued development and work of the Single Resolution Fund. The programme also includes a section on ‘Benchmarking resolution plan’, where the Board expresses its intention to focus on benchmarking tools, harmonisation and dissemination of best practices identified in the assessed resolution plans. See Single Resolution Board (2017a). The Single Resolution Mechanism has also published a high level document on ‘Introduction to Resolution Planning’ where the resolution planning phase is detailed as follows: at first there is a detailed overview of the bank which includes a description of bank’s business model, critical functions, core business lines, internal and external interdependencies etc. Then, a preferred resolution strategy is drawn by the SRB which implies an evaluation as to whether the bank can instead be wound down under normal insolvency proceedings. If that is not the case, and the bank needs to be resolved, the next phase would be the evaluation of possible impediments to resolvability. Following that, the Board will move to address those impediments and determine bank’s MREL. Finally, the bank is entitled to express comments in relation to the plan, which will form part of it. The chapters in which a plan should be divided into are: Strategic Business Analysis; Preferred Resolution Strategy; Financial and Operational Continuity in Resolution; Information and Communication Plan; Conclusion of the Resolvability Assessment; Opinion of the Bank in relation to the Resolution Plan. See Single Resolution Mechanism (2016).

  11. See mainly the cases of Banco Popular, acquired by Santander and of Veneto Banca, sold to Banca Intesa. In both cases, the banks tried to raise liquidity in capital markets, but the amounts successfully raised did not prove sufficient in the medium term.

  12. 12 CFR Part 252 (Regulation YY; Docket no. 1438; RIN 7100-AD-86) Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organisations.

  13. On the FOLF test, see also European Banking Authority (2015).

  14. The terminology is different too. While EU law uses the ‘failing or likely to fail’ test, US law mentions the company being ‘in default or in danger of default’. See, for instance Title II, sec. 202(a)(1)(A)(iii) Dodd-Frank Act.

  15. See Art. 32(4)(a) BRRD.

  16. See sec. 203(4)(A) and (B) Dodd-Frank Act.

  17. See Art. 32(4) BRRD.

  18. See para. 35 of the BRRD and para. 48 of the SRM Regulation.

  19. See sec. 203(a)(2)(C) Dodd-FrankAct.

  20. See Olivares-Caminal and Russo (2017).

  21. Recovery plans are prescribed under US law too. However, the amount of guidance and transparency around them is considerably lower. See FED (2014).

  22. While there is no specific definition of public interest, consideration is given to the provision of critical functions, the need to protect depositors, public and clients funds and assets, as well as the existence of a threat to financial stability. These are the resolution objectives set out by the BRRD and the SRM Regulation.

  23. It is also worth mentioning how, even where the public interest test was not met at SRB level—as with the insolvency of Veneto Banca in Italy—a different conclusion could still be reached at national level. In the Veneto Banca case, the SRB decided that the bank was failing or likely to fail, yet as there was no public interest at stake, the bank was resolved under the applicable Italian insolvency law. However, the Italian government decided that there was in fact a public interest to protect the regional economy and therefore provided financial and other support to the acquiring bank to favour the purchase. See D.L. 25 Giugno 2017, n 99. Disposizioni Urgenti per la Liquidazione Coatta Amministrativa di Banca Popolare di Vicenza s.p.a.e di Veneto Banca s.p.a., in G.U. n 146 of 25 June 2017, converted into Law on 8 August 2017 (Legge 31 Luglio 2017 n 121, in G.U. n 184 of 8 August 2017). This decision seems to be consistent with an earlier opinion of the SRB, in 2015, which deemed the liquidation of the group under national insolvency proceedings as not credible due to the ‘potential adverse impact of liquidation of the group on market confidence and the risk of contagion to tother credit institutions’. See Single Resolution Board (2017b), para. 19.

  24. See Federal Deposit Insurance Corporation and Single Resolution Board (2017). The European Banking Authority has entered into a similar cooperation agreement with different US Agencies in charge of bank resolution. See U.S. Authorities and European Banking Authority (2017).

  25. Federal Deposit Insurance Corporation and Single Resolution Board (2017), para. 14.

  26. Ibid.

  27. Federal Deposit Insurance Corporation and Single Resolution Board (2017), para. 21.

  28. Namely: JP Morgan Chase, Goldman Sachs Group Inc, Morgan Stanley, Citigroup, State Street Bank, Wells Fargo, Bank of America Corporation, and Bank of New York Mellon.

  29. Para. 44 of the SRM Regulation subjects resolution plans to the ‘requirements of professional secrecy’ laid down in the Regulation due to ‘the sensitivity of information contained in them’. Para. 116 too insists on the need to keep confidential any information related to resolution plans.

  30. However, in the UK the Bank of England issued in May 2017 a document detailing the amount of MREL that certain SIB operating in the UK must hold to be prepared for resolution. See Bank of England (2017a).

  31. See Bank of England (2017b), p 22.

  32. As it is well known, the Dodd-Frank Act is an incredibly complex piece of legislation which relies heavily on the implementing measures issued by relevant agencies. This piecemeal approach resulted in a long and articulated maze of rules and regulations that may be seen as lacking coherence. The Act includes roughly 1300 sections, divided into 16 titles. It is available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf. A list of all Dodd-Frank final rules and orders is available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-FrankFinalRules/index.htm. For an academic analysis of the Act, see: Coffee (2011), Wan (2016), Fischer (2015), Hansberry (2012), Richardson (2012), Stunda (2016), Prasch (2012).

  33. The FSOC was established by the Dodd-Frank Act (Title I, sub (A), sec. 111) to identify risks to financial stability, to promote market discipline, and to respond to emerging threats to the stability of the United States financial system.

  34. See sec. 112(2)(I); 115(b)(1)(D) and (d)(1) Dodd-Frank Act.

  35. The FDIC is the US federal agency in charge of deposit insurance. As of 30 September 2011, the FDIC insured approx. 6.78 trillions of deposits held in more than 7445 depository institutions. See IDI Rule 12 CFR Part 360 (RIN 3064-AD-59), p 2.

  36. Regulation QQ 12 CFR Part 243, issued in accordance to sec. 165(d)(8) of the Dodd-Frank Act, includes among those institutions required to submit a resolution plan: ‘Any foreign bank or company that is a bank holding company or is treated as a bank holding company under section 8(a) of the International Banking Act of 1978 (12 USC 3106(a)), and that has $50 billion or more in total consolidated assets, as determined based on the foreign bank’s or company’s most recent annual or, as applicable, the average of the four most recent quarterly Capital and Asset Reports for Foreign Banking organizations as reported on the Federal Reserve’s Form FR Y-7Q (“FR Y-7Q”)’. In the literature, see: Lapres (2011), White (2010).

  37. See http://www.fdic.gov/regulations/reform/resplans/.

  38. See sec. 165(d)(1) Dodd-Frank Act.

  39. See sec. 165(d)(1) Dodd-Frank Act.

  40. See sec. 165(4) and (5)(A) Dodd-Frank Act. In this case, the FED however shall consult with each member of the Financial Stability Oversight Council (FSOC) that primarily supervised an involved entity, see Regulation QQ 12 CFR Part 243.7(a), whereas it only may consult with foreign supervisory authorities or any other federal or State supervisor (Regulation QQ 12 CFR Part 243.7(b)).

  41. In their assessment of the 2015 plans, the Agencies concluded that the bank had not successfully addressed two of the three deficiencies (related to ‘legal entity rationalisation’ and ‘shared services’) and decided to impose growth restrictions. Wells Fargo has been prohibited from establishing international bank entities or acquiring any non-bank subsidiaries until the Agencies are satisfied that the deficiencies have been successfully addressed. Should they not be satisfied, they will impose further restrictions. Specifically they will ‘limit the size of the firm’s non-bank and broker dealer assets to levels in place on September 30, 2016’. See Federal Deposit Insurance Corporation and FED (2016a).

  42. Regulation QQ 12 CFR Part 243.

  43. See FED (2012).

  44. Federal Deposit Insurance Corporation and FED (2013a), and Federal Deposit Insurance Corporation and FED (2013b).

  45. FED (2013a).

  46. FED (2013b). These focus on: Collateral Management, Payment Clearing and Settlement Activities, Liquidity and Funding, Management Information Systems, and Shared and Outsourced Services.

  47. Federal Deposit Insurance Corporation and FED (2016b).

  48. Federal Deposit Insurance Corporation and FED (2016b), p 3.

  49. Regulation YY 12 CFR Part 252 (RIN 7100-AD-86).

  50. As mentioned in Sect. 1 and in the conclusions of this paper, a similar requirement for foreign banks is currently debated in Europe, as part of the proposed amendment to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338 (Capital Requirements Directive) and to Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 [2013] OJ L176/1.

  51. See IDI rule 12 CFR Part 360 (RIN 3064-AD-59). Please note, an interim final rule was issued in 2011 and was effective from 1 January 2012 to 1 April 2012 until superseded by the current version. The previous Interim Final Rule was the 76 FR 58 379 (September 21, 2011).

  52. In essence, the FDI Act disciplines all aspects of a possible FDIC receivership. The receivership is activated upon the insolvency of the bank. As of January 2012, 37 institutions are covered by the IDI rule, which cumulative hold approx. 4.14 trillion in insured deposits.

  53. See IDI rule 12 CFR Part 360, p 19.

  54. Federal Deposit Insurance Corporation (2014).

  55. Even if CH 11 is focused on reorganisation, a liquidation plan is also possible. For a detailed summary of the main provisions of CH 11 see United States Court (2018).

  56. The IDI Rule defines Material Entity as ‘a company that is significant to the activities of a critical service or a core business lines’. Similarly, Regulation QQ defines it as ‘a subsidiary or foreign office of the covered company that is significant to the activities of a critical operation or core business line’. One submitter bank distilled the legal definition even further, identifying MLE as those that: ‘(a) contract with and manage key global client relationships in the local marketplace (“Client Facing” or “CF”), (b) are direct members or participants of Financial Market Utilities (“Membership Holder” or “MH”), (c) accept client deposits/provide a source of liquidity necessary to fund Critical Operations and settlement obligations (“Liquidity Provider” or “LP”) and (d) are instrumental in managing and moving liquidity to and FMUs/paying agents, and/or provide other key operational infrastructure (“Service Infrastructure” or “SI”). In addition, State Street assessed an entity’s role within the delivery of its Critical Operations, focusing on the levels of dedicated personnel, whether work could be transferred to other designated Material Entities or where specific contracts with FMUs are held’. See State Street (2015a), p 29.

  57. The different identification of core business lines of the covered companies is justified also by the applicable definitions. The IDI rule defines them as ‘those business lines of the CIDI, including associated operations, services, functions and support that in the view of the CIDI upon failure would result in a material loss of revenue, profit or franchise value’, IDI Rule sec. 360.10(b). Sec. 243.2(d) of Regulation QQ defines them as ‘those business lines of the covered company including associated operations, services, functions and support that in the view of the covered company upon failure would result in a material loss of revenue, profit or franchise value’. Basically, in the CIDI plans the focus is on the deposit taking institution, whereas in the DFA plans the focus is on the non-bank financial company or the domestic or foreign bank holding company. So for instance, for DFA purposes one company identified its core business lines as: investment banking, financial advisory, underwriting, institutional client services, fixed income, currency and commodities, client execution, and equities. For CIDI purposes instead the same company identified the following core business lines: deposit taking, private bank lending, corporate lending, and interest rate derivatives product. A noticeable difference can be found in the definitions of critical operations instead, which in the IDI rule are called critical services.

  58. This is an example of a Single Point of Entry strategy, as will be discussed extensively in Sect. 6 of this paper.

  59. This is the case of State Street (2015b).

  60. The Multiple Acquirer Strategy and the Liquidation Strategy are actually being requested by the FDIC. The FDIC also details certain expectations as to the content of the strategies. See Federal Deposit Insurance Corporation (2014).

  61. Even though some plans are more articulated than others. For instance Goldman Sachs Bank (GSB) plan is extremely detailed. It considers both a multiple acquirer strategy and a liquidation strategy and it specifically includes the transfer of the derivatives portfolio of the covered institution to the bridge bank. Both strategies will terminate with the winding down of the bridge bank. Under the Multiple Acquirer Strategy GSB loans would be sold through the disposal of entire portfolios to a small number of targeted investors and ‘in some cases, purchasers may also assume some of the bridge bank’s insured term deposits in order to finance the loans’. As for the derivatives portfolio, part of it will reach maturity whereas the remaining positions would be closed either via novation, negotiated termination or portfolio sale. Overnight deposits are expected to be withdrawn over several weeks, whereas term deposit with a remaining tenure of more than 1 year ‘may either be transferred to other banks in conjunction with the sale of certain loan portfolios, or they may be transferred without a corresponding asset sale, albeit at a higher premium. The remainder is repaid upon reaching contractual maturity’. Under the liquidation strategy the bridge bank is wound down as follows: ‘Loans: In comparison with the Multiple Acquirer Strategy, the Liquidation Strategy calls for the bridge bank’s loans to be sold in a more piecemeal fashion, to a wider range of investors over a longer period of time. Derivatives: The exit strategy for the bridge bank’s derivatives positions is the same under the Liquidation Strategy as under the Multiple Acquirer Strategy. Deposits: All of the bridge bank’s overnight deposits are assumed to be withdrawn by clients over several weeks, and its term deposits are repaid upon reaching contractual maturity.’ See Goldman Sachs Bank US (2015).

  62. For instance, State Street bank envisages a great interest from global, national or regional financial institutions, private equity or other buyers of financial assets. Ideally Global Custody should be preserved ‘as an integrated business in a sale transaction, in order to minimize disruption to its clients and to maximize the value of the basket of interconnected and synergistic services that State Street offers today; Material Entities that are sufficiently self-sustaining and able to continue operations in the ordinary course of business would not need to be placed into resolution proceedings’. See State Street (2015b), p 16.

  63. As included in Federal Deposit Insurance Corporation (2014), p 3.

  64. Ibid., p 2.

  65. One of the respondents to the FDIC consultation document related to the IDI rule highlighted the distortions that this provision may ingenerate. The respondent noted that it is the FDIC to be best suited to evaluate the cost of the resolution strategy, which can be done only after its execution; and that giving covered companies the power to choose the ‘least costly’ strategy would dissuade them from considering other resolution strategies. See IDI rule 12 CFR Part 360, pp 9–10.

  66. See Regulation QQ 12 CFR Part 243.2(o).

  67. See Bennett and Unal (2014), p 4. On a related matter, the OECD recently published a report on the estimated costs that could be incurred by bank creditors and taxpayers in case of a bank who has or is about to fail. See Blix Grimaldi et al. (2016), p 1.

  68. Sec. 208(a) Dodd-Frank Act states that ‘Effective as of the date of the appointment of the Corporation as receiver for the covered financial company under section 202 […] any case or proceeding commenced with respect to the covered financial company under the Bankruptcy Code or the Securities Investor Protection Act of 1970 (15 U.S.C. 78 aaa et seq.) shall be dismissed’. The same fact that proceedings have commenced before a bankruptcy court is an indicator of the default of the company under OLA requirements (see sec. 203(4)(A)).

  69. See Yellen (2016), p 3.

  70. OLA has been put under scrutiny by the current administration, which started in 2017. Critics of the special insolvency procedure broadly argue that it institutionalises the idea that banks may be ‘too big to fail’ mainly because Title II establishes an ad hoc fund to be accessed by the FDIC in case of need. Because the Fund may have an impact on public budget, it is debated whether Congress could repeal Title II with a simple majority only. Bernake (2017). Irrespective of the political debate, Title II establishes clear priorities and objectives in the use of OLA: banks should be liquidated in a manner that mitigates risk to financial stability and ‘minimises moral hazard’; creditors and shareholders will bear the losses; the original management will be replaced; and staff responsible for the financial condition of the company will have to bear losses too. See Dodd-Frank Act, sec. 204(a)(1), (2), and (3). The FDIC is also prohibited from taking any equity interest in, or becoming a shareholder of, the failing company. See sec. 206(6).The Fund is disciplined at sec. 204a(d). Ironically enough, an IMF study recently shows that the implicit government subsidies for systemically important banks in the United States may be increasing, irrespective of the existence of the Fund. See IMF (2014), Ch. 3, p 104.

  71. Among those analysed only one submitter specifically mentions OLA procedures to favour a recapitalisation under Title II in the unlikely event of their default and of the lack of viable private sector solutions. See JP Morgan Chase Bank N.A. (2015), p 3. Available at http://www.fdic.gov/regulations/reform/resplans/. The possibility of creating a new-co which ‘parallels the framework of a Chapter 11 reorganization’ is also mentioned in the minutes of an FDIC advisory committee, see Federal Deposit Insurance Corporation (2012), p 31. However, it should be noted that some commentators exclude the possibility of creating a ‘bridge bank’ under CH 11. This entails that the possible bridge bank, which will in fact be a recapitalised new-co acting as a source of strength for the viable subsidiaries, is still fully an OLA disciplined mechanism. See FED (2011), p 7 and fn. 43.

  72. See also the FDIC paper detailing how the FDIC could have managed an orderly wind down of Lehman Brothers had Title II of Dodd-Frank Act been in existence at the time. Federal Deposit Insurance Corporation (2011).

  73. Contrary to this interpretation may run the fact that only seven respondents commented on the CIDI rule when it was put under consultation. Which is a relatively small number compared to the amount of banks that will be subjected to it and considering that respondents include banks, individuals and industry and trade groups. This may also reflect banks’ perception that in case of systemic crisis, they will be liquidated under Title II of the Dodd-Frank Act, rather than under FDI Act.

  74. Regulation QQ 12 CFR Part 243.

  75. More specific information requirements are included in Federal Deposit Insurance Corporation and FED (2013a).

  76. See Regulation QQ 12 CFR Part 243.4(a)(1), (b)(j).

  77. Other minor differences are based on companies’ size. So if the covered company holds less than 100bn in total non-bank assets and their total deposit insured assets comprise 85% or more of the covered company’s total consolidated assets, it should file a tailor made version of the plan which is limited to certain informational items only. See Regulation QQ 12 CFR Part 243.4(3).

  78. Regulation QQ 12 CFR Part 243.4(4)(i); Federal Deposit Insurance Corporation and FED (2013a), II (D): Stress Scenarios.

  79. In the US, G-SIBs submitted resolution plans for the first time in 2013. However, the Agencies made public the feedback letters only starting from April 2016. This means that in those letters Agencies provide comments on the 2015 plans, and indicate the deficiencies and shortcomings that they wanted to be addressed in the 2016 or 2017 plans. Following that, in December 2016 Agencies issued feedback letters for ‘Targeted Submissions’, namely to those banks which had deficiencies to address in their 2016 plans. Finally, in December 2017 the Agencies issued feedback to all eight G-SIBs commenting on the 2017 plans submission. All letters are available at http://www.federalreserve.gov/supervisionreg/resolution-plans.htm.

  80. Available at http://www.federalreserve.gov/supervisionreg/resolution-plans.htm.

  81. Specifically, these relate to the separability analysis of divestiture options for Wells Fargo and Goldman Sachs (see Federal Deposit Insurance Corporation and FED (2017a), p 4; Federal Deposit Insurance Corporation and FED (2017b), p 6); to the analysis of their derivative portfolio (see Federal Deposit Insurance Corporation and FED (2017c), p 5); or in relation to their legal entity rationalisation with specific reference to the possible difficulty in providing liquidity assistance to 27 MLEs (see Federal Deposit Insurance Corporation and FED (2017d), p 5).

  82. See Federal Deposit Insurance Corporation and FED (2017e).

  83. Methodologies and capital calculation are detailed and required in Federal Deposit Insurance Corporation and FED (2016b), pp 4–8. For plans that addressed specifically capital and liquidity deficiencies see: Citigroup (2016), pp 16–20 and Citigroup (2017), pp 34–38; JP Morgan Chase (2016), pp 17–20 and pp 34–35 and JP Morgan Chase (2017), p 82; Bank of America (2016), pp 12–15 and Bank of America (2017), pp 11–16; State Street (2016), pp 19–27; and State Street (2017), pp 24–30.

  84. Federal Deposit Insurance Corporation and FED (2016b), p 4.

  85. On TLAC see: Davies (2015), Wilmarth (2016), Kupiec (2016). See also Wojcik (2016), pp 115–117.

  86. Federal Deposit Insurance Corporation and FED (2016b), p 5.

  87. Federal Deposit Insurance Corporation and FED (2016b), p 6.

  88. Federal Deposit Insurance Corporation and FED (2016b), p 7.

  89. Federal Deposit Insurance Corporation and FED (2016b), p 6.

  90. Federal Deposit Insurance Corporation and FED (2016b), p 7.

  91. As asked to JP Morgan Chase. See Federal Deposit Insurance Corporation and FED (2016c), p 8.

  92. See JP Morgan Chase (2016).

  93. ‘Legal entity Rationalization and Separability’ was one of the key areas to be addressed in the plans listed in the 2017 Guidance.

  94. For instance, Goldman Sachs established clearer ownership lines as follows: ‘(1) operating entities should not have cross-holdings in each other; (2) material operating and material service entities should not be owned by another material operating or material service entity; (3) there should be as few intermediate holding companies as regulatory or other considerations permit; and Fractional or split ownership of material entities should be avoided’. See Goldman Sachs (2016), pp 52–53. See also JP Morgan Chase (2016), pp 21–29; BNY Mellon (2016), pp 25–29.

  95. The bank focused on four specific areas to which apply rationalisation criteria: (1) organisation and business model, (2) financial resources, (3) interconnectedness, and (4) operational continuity. To each area corresponds sub criteria. The guiding principles in developing them were: (1) transparency; (2) actionability; (3) measurability. See JP Morgan Chase (2016), pp 21–22.

  96. In the 2017 Guidance, Agencies asked firms to develop criteria that govern firms’ corporate structure and arrangements between legal entities. Specifically Agencies requested that application of the criteria should: ‘(A) facilitate the recapitalization and liquidity support of material entities, as required by the firm’s resolution strategy. Such criteria should include clean lines of ownership, minimal use of multiple intermediate holding companies, and clean funding pathways between the parent and material operating entities; (B) facilitate the sale, transfer, or wind-down of certain discrete operations within a timeframe that would meaningfully increase the likelihood of an orderly resolution of the firm, including provisions for the continuity of associated services and mitigation of financial, operational, and legal challenges to separation and disposition; (C) adequately protect the subsidiary insured depository institutions from risks arising from the activities of any nonbank subsidiaries of the firm (other than those that are subsidiaries of an insured depository institution); and (D) minimize complexity that could impede an orderly resolution and minimize redundant and dormant entities. These criteria should be built into the firm’s ongoing process for creating, maintaining, and optimizing its structure and operations on a continuous basis.’ See Federal Deposit Insurance Corporation and FED (2016b), p 19.

  97. For banks with organisational deficiencies and for how these have been addressed see BNY Mellon (2016), pp 25–28 and BNY Mellon (2017), pp 65–68; Wells Fargo (2016), pp 7–9 and 13–15, Wells Fargo (2017), pp 29–31; State Street (2016), pp 13–18; JP Morgan Chase (2016), pp 21–28 and JP Morgan Chase (2017), pp 52–54; Bank of America (2016), pp 15–21, and Bank of America (2017), pp 17–21; Citigroup (2016), pp 11–13.

  98. This is an improvement from the 2015 plan submission, as noted in the Agencies feedback letters to all eight G-SIBs.

  99. As requested to BNY Mellon, Goldman Sachs, Bank of America, Citigroup, and JP Morgan.

  100. For instance one bank has developed a ‘service taxonomy’ and a ‘taxonomy mapping’ as follows: ‘State Street has developed a Service Taxonomy that captures and describes all of the services conducted within the organization, not just Critical Services. The Service Taxonomy is organized in a three-tiered structure, (…): Level One describes at a high level the business or corporate service area providing the services and is similar to business units or departments; Level Two is a more granular breakdown that indicates the type of services provided within a particular Level One area; and Level Three describes with specificity the services being provided. State Street inventoried all services provided according to this hierarchy and assessed all of the Level Three services to identify which of these services are Critical Services. As a global custodian, State Street often provides Critical Services in multiple locations, utilizing redundant capacity to provide coverage 24 hours per day.’ Even though, contrary to expectations: ‘Maintaining Critical Services in each current location would not be necessary to the execution of State Street’s Resolution Plan. State Street’s continuity plans will reflect maintaining Critical Services at the appropriate level in Material Entities in order to support Critical Operations in resolution.’ See State Street (2016), p 11.

  101. For a description of the specific operational deficiencies and how these have been addressed, see: Wells Fargo (2016), pp 10–12 and Wells Fargo (2017), pp 21–23; State Street (2016), pp 10–13 and State Street (2017), pp 29–31; JP Morgan Chase (2016), pp 32–33 and JP Morgan Chase (2017), pp 46–48; BNY Mellon (2016), pp 21–24 and BNY Mellon (2017), pp 47–64.

  102. See Federal Deposit Insurance Corporation and FED (2016b), p 12. With regard to clearing and settlement capacity in resolution, a good practice can be considered the one introduced by State Street, which created a ‘Stress Cash Positioning Operating Model (“SCPOM”), in which State Street documents its protocols to satisfy settlement funding requirements and addresses the central processing of extensions of credit in connection with settlement and liquidity needs’. See State Street (2015a), p 20.

  103. These are improvements indicated by the Agencies in their April 2016 Letters.

  104. See Federal Deposit Insurance Corporation and FED (2017e).

  105. Ibid.

  106. See Avgouleas et al. (2013); Feibeleman (2011); Goodhart (2010); Huertas (2010); Kaufman (2010); Feldman (2010); Packin (2012); Herring (2010); Costner (2012); Mayer and Tarbert (2011).

  107. Specifically, the 2017 Guidance requires that, among the others, governance mechanisms related to playbook and triggers: ‘should detail the board and senior management actions necessary to facilitate the firm’s preferred strategy and to mitigate vulnerabilities, and should incorporate the triggers identified below. The governance playbooks should also include a discussion of (A) the firm’s proposed communications strategy, both internal and external; (B) the boards of directors’ fiduciary responsibilities and how planned actions would be consistent with such responsibilities applicable at the time actions are expected to be taken; (C) potential conflicts of interest, including interlocking boards of directors; and (D) any employee retention policy.’ Also, ‘The firm should demonstrate that key actions will be taken at the appropriate time in order to mitigate financial, operational, legal, and regulatory vulnerabilities. To ensure that these actions will occur, the firm should establish clearly identified triggers linked to specific actions for: (A) the escalation of information to senior management and the board(s) to potentially take the corresponding actions at each stage of distress post-recovery leading eventually to the decision to file for bankruptcy; (B) successful recapitalization of subsidiaries prior to the parent’s filing for bankruptcy and funding of such entities during the parent company’s bankruptcy to the extent the preferred strategy relies on such actions or support; and (C) the timely execution of a bankruptcy filing and related pre-filing actions.’ See Federal Deposit Insurance Corporation and FED (2016b), pp 9–10.

  108. See BNY Mellon (2016), p 33. In the specific case of BNY Mellon the ‘Resolvability Steering Committee’ is supported by a ‘Resolvability Leadership Team’ which manages the day-to-day programme and advises the Committee of key strategic issues and execution risks.

  109. See Bank of America (2016), p 21.

  110. See Federal Deposit Insurance Corporation and FED (2016d), p 9.

  111. Federal Deposit Insurance Corporation and FED (2016e), p 13.

  112. See Federal Deposit Insurance Corporation and FED (2016f), p 6; and Federal Deposit Insurance Corporation and FED (2016d), p 10.

  113. See Federal Deposit Insurance Corporation and FED (2016g), p 6.

  114. See Goldman Sachs (2016), p 6.

  115. But also ‘claims of fraudulent transfer, preference, breach of fiduciary duties, and equitable claims’. See Goldman Sachs (2016), p 23.

  116. Recent structural reforms in banking, such as the s.c. Volker rule in the US and the implementing measures of the Vickers Commission in the UK, go into the direction of remedying legal complexity too.

  117. See Federal Deposit Insurance Corporation and FED (2016b), p 19: ‘legal entity rationalization criteria’.

  118. See Federal Deposit Insurance Corporation and FED (2016b), p 19: ‘legal entity rationalization criteria: separability’.

  119. See Federal Deposit Insurance Corporation and FED (2016d, g). In the letter to the former (Bank of America) this is seen only as a shortcoming, whereas in that to the latter (Wells Fargo) is considered a deficiency.

  120. See Federal Deposit Insurance Corporation and FED (2016e), p 7 and Federal Deposit Insurance Corporation and FED (2016g), p 8.

  121. See Federal Deposit Insurance Corporation and FED (2016c).

  122. Reference is to the latest criteria Agencies have included in their 2017 assessment guidance which consider responsiveness as ‘whether the companies complied with the prior feedback’. See Federal Deposit Insurance Corporation and FED (2016h), p 11. In reality, a Damocles sword hangs over the firms which can see their size and activities axed should Agency not be satisfied with the plan. See the case of Wells Fargo described above in Sect. 3.1.

  123. See for instance BNY Mellon (2016), p 27.

  124. See State Street (2016), p 18.

  125. It refers to the tool called: Connection, set up by BNY Mellon. See BNY Mellon (2016), p 4, p 10 and p 25.

  126. See Bank of America (2016), p 2.

  127. Citi is not much smaller, with just under 2 trillion in consolidated asset at Q1 2015. See Citigroup (2015), p 84.

  128. Financial Stability Board (2017).

  129. Regulation QQ 12 CFR Part 243.4(g), requires banks to ‘identify and map to the material entities the interconnections and interdependencies among the covered company and its material entities, and among the critical operations and core business lines of the covered company that, if disrupted, would materially affect the funding or operations of the covered company, its material entities, or its critical operations or core business lines. Such interconnections and interdependencies may include: (1) common or shared personnel, facilities, or systems (including information technology platforms, management information systems, risk management systems, and accounting and recordkeeping systems); (2) capital, funding, or liquidity arrangements; (3) existing or contingent credit exposures; (4) cross-guarantee arrangements, cross-collateral arrangements, cross-default provisions, and cross-affiliate netting agreements; (5) risk transfers; and (6) service level agreements’.

  130. The number of material entities, excluding the parent company, range from 33 (JP Morgan Chase), 17 (Goldman Sachs), 14 (BNY Mellon), 16 (Bank of America Corporation), 28 (Citigroup), 15 (State Street), 4 (Wells Fargo and Company) and 5 (Wells Fargo Bank), and 17 (Morgan Stanley).

  131. See Financial Stability Board (2016).

  132. See Goldman Sachs Bank US (2015), pp 26–27.

  133. For Agencies criticisms to one bank for failing to ‘identifying shared services and establishing SLAs and contingency arrangements that are critical to the successful execution of the bridge bank strategy’, see Federal Deposit Insurance Corporation and FED (2016i), p 6.

  134. Reference is to the 8 service providers over 17 MLEs in Morgan Stanley and to the 8 service providers over 17 MLEs in Goldman Sachs. The remaining service providers are 9 in Citi, 6 in Bank of America, 3 in JP Morgan, 5 in BNY Mellon, 4 in State Street. See above at footnote 130 for the total number of MLEs. An interesting analysis would be to look at the correlation between size of the service entities and their number. However, balance sheet data are not available for all service MLEs of all the analysed groups.

  135. See State Street model described in footnote 100 above, and the one by JP Morgan. In this latter case, ‘the Firm’s main operating bank entity, JPMorgan Chase Bank, N.A. (“JPMCB”), acts as the main contracting agent firm wide. This results in the majority of JPMorgan Chase’s third party vendor contracts for its Critical Shared Services being centralized in JPMorgan Chase Bank, N.A., its branches and subsidiaries. Furthermore, JPMorgan Chase Bank, N.A. is a central repository and manager of the majority of the firm-wide technology, real estate, personnel and other assets for the Firm’s Critical Shared Services. The concentration of assets, services and operations in these few entities results in contractual operational interconnectedness at JPMorgan Chase’. See JP Morgan Chase (2016), p 17.

  136. In some cases, staff may be directly employed by the service company and seconded to operating MLE, or the service company may only offer the remuneration package and other HR services. In the first case, the service company may also be the contractual counterparty to the firms pension plan; in other instances key personnel in resolution has been identified as being employed by the service company.

  137. Even though to different extent and level of details, all but one plan thoroughly describe operational interconnections with service providers. Wells Fargo instead provides the following succinct (and vague) description: ‘As the Company’s largest subsidiary, WFBNA [Wells Fargo Bank, National Association] provides products and services to its affiliates, including each of the Company’s other material entities, and WFBNA provides the majority of personnel, facilities, and systems infrastructure to support the Company’s operations. WFBNA also provides technology and operations support to each of the Company’s other material entities. The support services that WFBNA receives from other material entities are limited. WFBNA receives treasury, legal and other support services from the Parent, certain derivative clearing services from WFS LLC [Wells Fargo Securities LLC], and deposit account recordkeeping services for the sweep product offered by WFA LLC [Wells Fargo Advisors LLC] from FC LLC [First Clearing LLC]. Other points of operational interconnectedness include FC LLC clearing customer securities transactions on behalf of WFS LLC, WFA LLC and FiNet [Wells Fargo Financial Network LLC] and WFS LLC providing capital markets products and services to the Parent, WFBNA and other affiliates, including underwriting, debt placement, loan syndications and derivatives clearing services’. See Wells Fargo and Company, Wells Fargo Bank, National Association (2015), p 8.

  138. This becomes particularly relevant in those firms, such as BNY Mellow, where asset servicing is a core business line. Bank of America calls its Legacy Assets and Servicing a business segment with no core business lines attached.

  139. See Citigroup (2015), p 65.

  140. Ibid., p 65.

  141. See for instance State Street which relies on a system of: ‘Centers of Excellence (“COEs”) and Shared Services (“ShSs”), which are operated across the world, in order to provide comprehensive and consistent services to its clients. A COE is a group of personnel located throughout the world providing a single dedicated service across multiple client categories and utilizing centrally designed procedures and IT applications. COEs are utilities and ShSs representing like-activities across business lines, organized regionally and globally and containing client service components. ShSs also provide services across multiple client categories utilizing centrally designed procedures, but ShSs differ from COEs in that they focus more on regional and local needs. Each COE and ShS operates across multiple locations, including legal entities. This delivery model allows State Street to substantially reduce its geographic concentration risk by developing redundancies across regions, as well as to realize certain efficiencies by lowering service costs while achieving greater scale of operations and increasing the value of information technology investments to process standardization. Moreover, many of State Street’s shared internal services are provided through Centralized Corporate Service groups that are housed in SSBT [State Street Bank and Trust Company]. The centrality of SSBT to State Street’s operating model substantially mitigates the risk of loss of ShSs in a resolution scenario. Because most shared corporate services and many of State Street’s business operations are conducted within and delivered by SSBT, such services and operations would continue to be provided under the SPOE Strategy, because SSBT will be recapitalized and State Street entities receiving services will be able to continue to pay for them. Additionally, the failure of SSC would not trigger local resolution proceedings for entities that provide services in support of Global Custody or the termination of such services. Key service contracts are also designed to maintain continuity of service’.

  142. Other assets may derive from ‘prepaid expenses related to corporate taxes; deposits [in other banks] and advance payments on employees insurance plans’.

  143. In one case however some service entities are classified as ‘objects of sale’, to be sold jointly with the core business line for which they provide the majority of critical services. See Morgan Stanley (2015), p 43.

  144. However, it should be acknowledged that such mitigation strategy may only work if credit lines still operate smoothly in resolution. Ironically, the same firm admits that while the terms of their service agreements have been strengthened ‘to prohibit termination of intercompany services in resolution’, this is possible ‘so long as payment is received for the service’. See Citi Bank N.A. (2015), p 10.

  145. It should also be noted that authorities may not be able to intervene if the service company is not carrying out a regulated activity. Also, not in all business plans foreign authorities are considered as ‘material’: not being a material authority may hamper their ability to identify the problem in a timely fashion.

  146. See JP Morgan Chase (2016), p 32.

  147. Ibid.

  148. Financial Stability Board (2012a).

  149. Ibid., at p 15.

  150. Ibid., at p 15.

  151. Ibid., at fn 8.

  152. See Federal Deposit Insurance Corporation and FED (2013a), p 3. Considering that the 2017 Guidance is silent on the matter, we consider those strategies as still required. Agencies specify that bankruptcy ‘encompasses a proceeding under the U.S. Bankruptcy Code as well as a proceeding under another applicable insolvency regime’. See footnote 3 at p 3 of Federal Deposit Insurance Corporation and FED (2013a).

  153. Based on the requirements of the BRRD, European banks draw up recovery plans which are then presented for approval to the supervisor. In the US, while it is likely to imagine that banks have similar plans, these don’t appear to be as regulated as in Europe. In this matter, the responsible Authority is the FED, which issued guidance for the G-SIB in 2014, see FED (2014).

  154. See Citigroup (2016), p 7 and State Street (2015a), p 9.

  155. For instance, of the 33 MLEs of JP Morgan Chase, 13 are located abroad (London, Belgium, Bahamas, Philippines, China, Singapore, Australia, Japan, India, Germany, Ireland, Canada and Luxemburg); of the 17 MLEs of Bank of America, 7 are located abroad (London, Frankfurt, Singapore, India and Japan). It also strikes as odd that BNY Mellon that operates in 35 different jurisdictions, has only 4 foreign MLEs (Indian, London and Belgium), of which two are branches.

  156. See Wells Fargo (2017).

  157. See BNY Mellon (2015) and BNY Mellon (2016).

  158. See LB EHF v. Raiffaisen [2017] EWHC 522 (Comm), 20 March 2017; and Lehman Brothers Int v. Exxonmobil [2016] EWHC 2699 (Comm), 28 October 2016.

  159. In Europe, see Directive 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy [2017] OJ L 345/96.

  160. The FSB too recommended minimum amount of TLAC financial companies should hold to ensure loss absorbency and recapitalisation capacity see Financial Stability Board (2015).

  161. See Woods (2017), p 4.

  162. Ibid.

  163. See Prudential Regulation Authority (2017).

  164. Federal Deposit Insurance Corporation and FED (2017d).

  165. Ibid., p 6.

  166. See Russo (2016) and Nieto (2014) for a discussion on these groups as well as for a critical analysis of the effectiveness of cooperation in cross border resolution.

  167. See Bank of England and Federal Deposit Insurance Corporation (2012).

  168. See Art. 21b of the Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, COM/2016/0854 final—2016/0364 (Cod). http://www.eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52016PC0854.

  169. See FED (2011), p 3.

  170. 12 CFR Part 380 (Federal Deposit Insurance Corporation, Certain Orderly Liquidation Authority provisions under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act).

  171. 12 CFR Part 380 RIN 3064-AE39, 17 CFR Part 302 (Federal Deposit Insurance Corporation and Securities and Exchange Commission, Covered Broker Dealer Provisions under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act).

  172. For a detailed list please see Financial Stability Board (2012b) and Financial Stability Board (2013), from p 14.

  173. See 11 USC para. 1104(a)–(e).

  174. At 11 USC para. 363(b).

  175. See FED (2011), p 14.

  176. FED (2011), p 14.

  177. Ibid., p 7.

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Acknowledgements

The author wishes to thank anonymous EBOR reviewers for helpful comments and suggestions. She would also like to thank Thomas Jr Baxter, Philip Rawlings, Edgardo Ricciardiello, Dalvinder Singh, and Francesco Vella for useful comments. The findings of the paper were discussed at the ‘Roundtable on Financial Stability and Resolution: Emerging Perspective’, University of Edinburgh Law School, on 26 March 2018. She would like to thank participants to the Roundtable for the fruitful discussions. She would also like to express her gratitude to the several experts she discussed the paper with, which however would wish to remain anonymous. Errors are her own.

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  1. Senior Lecturer in International Banking Law and Business Ethics, Centre for Commercial Law Studies, Queen Mary University of London, London, UK

    Costanza A. Russo

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Correspondence to Costanza A. Russo.

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The author is a member of the Banking Union (Resolution) Expert Panel of the Economic and Monetary Affairs Committee (ECON) of the European Parliament. The views expressed are exclusively her own.

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Russo, C.A. Resolution Plans and Resolution Strategies: Do They Make G-SIBs Resolvable and Avoid Ring Fence?. Eur Bus Org Law Rev 20, 735–777 (2019). https://doi.org/10.1007/s40804-018-0127-1

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