Final ‘living will’ rule reduces requirements for smaller firms; only small firms may request changes

“Living will” (or resolution plan) requirements would be reduced for smaller financial firms that pose less risk to the financial system under a rule made final Monday by two federal banking regulators.

The Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) said the final rule retains living will elements already in place for the largest financial firms, although the agencies said that these institutions had become stronger since 2012 (when the requirements took effect).

According to the agencies, the final rule – substantially the same as proposed in April – affects domestic and foreign firms with more than $100 billion in total consolidated assets. However, financial institutions and firms with less than $250 billion in total consolidated assets that do not meet certain risk criteria would no longer be subject to the rule. “These firms have simpler structures, engage more exclusively in traditional banking activity, and present less risk,” the agencies said. “These changes do not affect the resolution planning requirements under the FDIC’s insured depository institution rule for large insured depository institutions, which is part of a separate rulemaking.”

However, the agencies noted that – in a change from the proposal – only smaller and less-complex firms could request changes to their full resolution plans, and both agencies would need to approve those requests for them to become effective.

The agencies said the final rule uses a separate framework for application of prudential requirements. It also establishes resolution planning requirements tailored to the level of risk a firm may pose to the financial system.

“For the most systemically important firms, the final rule would adopt the current practice of requiring resolution plans to be submitted on a two-year cycle,” the agencies said. “The final rule would tailor the rule’s requirements for firms that do not pose the same systemic risk as the largest institutions, requiring resolution plans to be submitted on a three-year cycle.”

The FDIC and the Fed said that both large and small firms would alternate between submitting full resolution plans and targeted resolution plans. Foreign firms with relatively limited U.S. operations would be required to submit reduced resolution plans.

A targeted resolution plan, the agencies said, would include core elements related to capital, liquidity, and plans for recapitalization, as well as material changes to the firm and areas of interest identified by the agencies.

Targeted resolution plans would not include certain areas if they are materially unchanged from one cycle to another, such as descriptions of management information systems and corporate governance systems, the agencies said. As a result, targeted resolution plans would give the agencies meaningful insight into the key vulnerabilities in a firm’s resolution strategy.

Agencies finalize changes to resolution plan requirements; keeps requirements for largest firms and reduces requirements for smaller firms