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UK and U.S. Comparison of Living Wills Requirements for Banks in the UK and U.S. - Part II , Contributed by Jerome Walker, SNR Denton

Tuesday, January 31, 2012

Part I of this article compared the basis for the requirement on bank holding companies, foreign banking organizations and U.S. branches and agencies of international banks to file a Living Will, the due dates, and the entities that must comply with this filing obligation. Part II examines the detailed content requirements of Living Wills and what will be disclosed to the public.



A recovery plan allows firms to plan how they would try to recover from severe adverse conditions that could cause their failure. Firms are responsible for preparing their recovery plans, which are subject to review by the Financial Services Authority (FSA) and require updating yearly. The ways in which financial strength may be rebuilt include:

  • Disposals of businesses or entities;
  • Raising equity capital when this is not part of the firm’s business plan;
  • Complete elimination of dividends and variable remuneration;
  • Debt exchanges and other liability management actions; and
  • Sale of the whole firm to a third party.

A key aspect is deciding when the firm will carry out its recovery plan. Firms will be required to develop their own unambiguous triggers, which may include:

  • Invocation of the firm’s contingency funding plan;
  • Negative market sentiment or opinion towards the firm, possibly measured by liquid market-based indicators (e.g., widening of a firm’s credit default swap spread relative to peers, an unexpected fall in share price relative to peers, etc.);
  • An expectation of a drop in a firm’s credit rating; and
  • Use of a firm’s capital planning buffers.


The purpose of resolution planning is to provide a strategy to resolve a failed firm or group in a manner that minimizes the impact on financial stability without needing to resort to taxpayer support. The UK authorities are responsible for preparing a resolution plan, which must allow decisions and actions to be taken and performed in a short space of time (for example, over a “resolution weekend”). However, firms must provide a resolution pack to the FSA, which is regularly updated to reflect any material developments in a firm’s business. The resolution pack must include:

  • Details of significant entities in the group and the key structural and operational issues relevant to separating significant legal entities. This will include details of a firm’s 20 largest interbank exposures, details of the size of the derivatives and securities financing books and booking and settlement systems, and other economic roles.
  • Critical Function Contingency Analysis covering separation and/or “controlled wind-down” for each critical role of the firm. The FSA will require an uninterrupted stream of service provision for critical roles such as deposit-taking, the payment services offered by providing current accounts, or the making of markets critical for the UK financial system to function.
  • Plans to overcome any barriers to resolution which the UK authorities consider unacceptable. Resolution may be more difficult depending on where critical roles are within the group, whether the group uses a branch or subsidiary structure, and whether there is comingling of economic roles in a single legal entity or if an economic role spans multiple legal entities. Preparatory actions might include steps to reduce the risk profile of a firm, such as simplification of intra-group relationships, changes in contractual arrangements, increased standalone capacity, changes in corporate structures, and operational set-ups to ease the separation of certain roles.


The FSA’s Client Assets sourcebook (CASS) resolution pack aims to reduce the wider economic cost of an in-scope firm failure. It ensures that information and records that would help an insolvency practitioner or resolution authority return client money and custody assets to clients more quickly will be accessible to the insolvency practitioner or resolution authority after the firm’s failure.


At a minimum, U.S. Living Wills must include an executive summary, a strategic analysis, a section covering corporate governance relating to resolution planning, a section covering organizational structure and related information, a section on management information systems, a section covering interconnectedness and interdependencies, a section covering supervisory and regulatory information, and contact information for a senior management official of the systemically important financial institution (SIFI).1 During the annual stress tests of the U.S. SIFIs, the U.S. SIFIs will be provided with different sets of economic conditions under which the stress tests will be conducted (baseline, adverse, and severely adverse).2 In preparing Living Wills, U.S. SIFIs may assume that a failure would occur under the baseline economic condition or a reasonable substitute developed by the U.S. SIFI if a baseline economic condition is not then available.3 U.S. Living Wills require the U.S. SIFIs to provide a comprehensive blueprint on how to reorganize or liquidate the U.S. SIFI in the event of material financial distress or failure. (In the case of a SIFI not incorporated or organized in the U.S., the subsidiaries and operations of the foreign company that are domiciled in the U.S. will be the focus of the Living Will.) Under 12 C.F.R. 381.2(m), material financial distress means:

  • The SIFI has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the SIFI to avoid such depletion;4
  • The assets of the SIFI are, or are likely to be, less than its obligations to creditors and others;5 or
  • The SIFI is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.6


The Living Wills must be detailed enough to help the resolution authority resolve the U.S. SIFI in a rapid and orderly way if the potential failure of the U.S. SIFI would threaten the stability of the U.S. financial system. To create such a blueprint, the U.S. SIFI must analyze the restructuring and insolvency laws in each of the jurisdictions where it has assets and liabilities, account for all of its legal entities, and understand how the products and services it offers operate within and across business lines. In addition, the U.S. SIFI must analyze how its businesses and business model will be affected by events that occur at related and unrelated interconnected companies. Equally important, the strategic analysis must identify the range of options and specific actions to be taken by the U.S. SIFI to facilitate a rapid and orderly resolution of the SIFI, its material entities, critical operations, and core business lines in the event of its material financial distress or failure. Under12 C.F.R. 381.2 (l), a “material entity” is a subsidiary or foreign office of the SIFI that is significant to the activities of a critical operation or core business line. A “critical operation”7 is an operation of the SIFI, including associated services, functions, and support, the failure or discontinuance of which (in the view of the SIFI or as jointly directed by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve) would pose a threat to the financial stability of the U.S. A “core business line”8 is a business line of the SIFI (including associated operations, services, functions, and support) that (in the view of the SIFI) upon failure would result in a material loss of revenue, profit, or franchise value.

A U.S. SIFI may limit its strategic analysis with respect to a material entity that is subject to an insolvency regime other than the U.S. Bankruptcy Code to a material entity that either has $50 billion or more in total assets or conducts a critical operation so long as the analysis references the applicable regime. Funding, liquidity, support functions, and other resources (e.g., capital sources) must be identified and mapped to the SIFI’s material entities, critical operations, and core business lines. To meet these requirements, many SIFIs will have to establish internal teams that must be supported by a wide range of experts, including lawyers, consultants, and other professionals. Depending on the complexity of the SIFI, many experts project that the initial Living Will could take at least nine months to complete. The FDIC and the Federal Reserve estimate the burden for each SIFI to be 12,400 hours for initial implementation and 2,881 hours annually on an ongoing basis, though many believe this estimate to be significantly understated.

U.S. SIFIs in countries outside of the U.S. where the head office has more than $50 billion in consolidated assets but limited U.S. operations must include in their Living Wills a close analysis of how the Living Will fits within the SIFI’s (in this case, the head-office SIFI) overall resolution or contingency planning process. All U.S. SIFIs must incorporate resolution planning into their overall business planning processes, because such resolution planning is considered to be a precondition for effective crisis management and resolution. The analysis must also include the nature and extent of the head office’s related crisis management and resolution planning. The corporate governance structure of the Living Will must include information on how resolution planning is integrated into the corporate governance structure and processes of the U.S. SIFI, and identify the senior management official who is primarily responsible for overseeing the development, maintenance, implementation, and filing of the Living Will and for the U.S. SIFI’s compliance with the final rule issued by the FDIC on 13 September 20119 (FDIC Final Rule), as approved by the Federal Reserve.10 The largest and most complex U.S. SIFIs may be required to establish a central planning function headed by a senior management official who reports to the chief risk officer or the chief executive officer. Periodic reports may also be required to be made to the SIFI’s board of directors (or, in the case of a foreign banking organization, someone with express delegated authority from the board of directors), which must approve the Living Wills, both initially and annually.

The Living Wills must also include the SIFI’s overall organizational structure and related information, including a hierarchical list of all material entities, with jurisdictional and ownership information mapped to core business lines and critical operations, and an analysis of the challenges or barriers created by the laws, regulations, and policies of different countries. This is a big issue, because U.S. laws are typically territorial and so are the laws of many other countries.11 There almost certainly will be many cases where U.S. law addresses the disposition of assets located in the U.S. and the law of the other country is silent on the disposition of those assets. In other cases, U.S. laws and the laws of other countries may claim a superior right to the same asset. Chapter 1512 of the U.S. Bankruptcy Code (Chapter 15) may be helpful in providing a forum for resolving those issues, but Chapter 15 is not an answer to this problem. It is also significant that the scope of the U.S. Living Will may require SIFIs to understand and address not just U.S. bankruptcy and other insolvency laws, but also the insolvency laws of other countries where the financial institutions are active or have operations. Outside of the “Orderly Liquidation Authority” which the FDIC has pursuant to Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), but is rarely likely to use, in the U.S., the most relevant insolvency law for U.S. bank holding companies and unregulated non-bank subsidiaries of U.S. bank holding companies is the U.S. Bankruptcy Code. In the same vein, the most important insolvency law for insured depository institutions (including FDIC-insured branches of international banks) is the FDIA.13 For wholesale branches and agencies of international banks that are federally licensed, the most important insolvency law may be the International Banking Act of 1978.14 For wholesale branches, and agencies of international banks, that are state licensed, the most important insolvency law may be found in the state banking law.15 The Securities Investor Protection Act of 1970 is an important insolvency law for U.S. broker dealers,16 and state insurance laws17 are the primary insolvency law for insurance companies.

In many cases, U.S. laws will provide for ring-fencing the U.S. assets in a way that makes it extremely challenging for non-U.S. parties to gain access to those assets. This is true even if the foreign banking organization takes advantage of Chapter 15, which is designed to encourage international co-operation on international insolvency matters involving the U.S. One of the contexts in which this challenge is made clear is in determining the disposition of U.S. correspondent accounts that are owned by non-U.S. financial institutions. In New York, for example, it is not uncommon for the New York branch of an international bank to maintain tens of millions (if not a greater amount) of dollars in accounts where the account holder is a non-U.S. branch of the head of office. The disposition of these accounts would generate interest both in the U.S. and outside of the U.S. This is also important because many U.S. branches and agencies of international banks serve as the global U.S. dollar clearing bank for all of the head office’s non-U.S. branches and agencies.

Living Wills must also include information regarding material assets, liabilities, derivatives, hedges, capital and funding sources, major counterparties, and trading, payment, clearing, and settlement systems utilized by U.S. SIFIs. Moreover, U.S. SIFIs must provide information on the management information systems supporting their core business lines and critical operations, including legal ownership of the systems and associated software, licenses, or other associated intellectual property. In addition, the Living Wills must identify the appropriate regulatory agencies and resolution authorities in those countries and explain how those regulatory agencies and resolution authorities will work together with the U.S. authorities to resolve the non-U.S. operations of the U.S. bank holding company SIFIs and presumably the U.S. operations of the U.S. branches and agencies of international banks.


There is no suggestion that institutions covered by the UK proposals will have to make public any element of their Recovery and Resolution Plans. Instead, their regular updates to the plans will form part of the normal regulatory supervisory process.


Living Wills will be treated like confidential Federal banking agency examination and supervisory information and will generally not be subject to public disclosure under the U.S. Freedom of Information Act (FOIA) because the content of the Living Wills will necessarily contain trade secrets and other confidential supervisory information protected by either or both FOIA exemptions (b)(4) and (b)(8).18 The FDIC Final Rule, however, attempts to balance the need for confidentiality with the public’s need for transparency. Thus, Living Wills will contain both a confidential section and a public section, and the public section will be made available pursuant to the FOIA and the implementing regulations of the FDIC19 and the Federal Reserve.20 The public section will include an executive summary that describes the business of the SIFI and, to the extent material to an understanding of the SIFI:

  • Names of material entities;
  • Description of core business lines;
  • Consolidated or segment financial information regarding assets, liabilities, capital, and major funding sources;
  • Description of derivatives activity and hedging activity;
  • List of memberships in material payment, clearing, and settlement systems;
  • Description of foreign operations;
  • Identities of material supervisory authorities;
  • Identities of principal officers;
  • Description of the corporate governance structure and processes related to resolution planning;
  • Description of material management information systems; and
  • Description, at a high level, of the SIFI’s resolution strategy, covering such items as the range of potential purchasers of the SIFI and its material entities and core business lines.


The UK and the U.S. are well ahead of many other countries in making progress on developing rules and requirements for Living Wills. A close comparison of the Living Wills requirements of the two countries, however, shows that there are significant differences in who is covered, what is to be included in the Living Wills, and the information in Living Wills that will be disclosed to the public. In addition, while the UK also requires a SIFI recovery plan, the U.S. does not. While the banking supervisory process is designed to ensure safety and soundness of the operations of financial institutions (including those subject to enhanced or heightened prudential supervision), and state insurance regimes are designed to maintain the solvency of insurance companies, U.S. Living Wills are not designed to insert the government into the day-to-day operations of companies that do not need to be resolved. Nonetheless, in the U.S., for companies that are designated by the Financial Stability Oversight Council as a SIFI (and will be subject to the supervision of the Federal Reserve), the existence of year-round onsite examiners, the consistent receipt of supervision guidance, and tough examinations may cause companies to wonder whether the government is encroaching on their day-to-day operations.

© 2012 SNR Denton US LLP

Jerome Walker is a member of SNR Denton’s Corporate and Business Transactions practice. He focuses on regulation, supervision and compliance activities of commercial banks, investment banks, and the United States operations of international banks. Jerome’s practice crosses many sectors and spans multiple geographies. Jerome is a former senior attorney for the comptroller of the currency, a former general counsel and chief compliance officer for the U.S. operations of HongkongBank and a former managing director and head of bank regulatory compliance for Deutsche Bank Americas. Telephone: + 1 212 768 5371; E-mail:  


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