Discussing the regulatory uncertainty around level of expectation for FBOs

Discussing the regulatory uncertainty around level of expectation for FBOs

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By David Ambler, Former Head of US Resolution Planning, Societe Generale.

David, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I spent the past 10 years with Societe Generale in a number of senior strategic change roles, the past five focused on DFA regulatory change. I led the development of SG’s section 165 US Resolution Plan from inception, was primary face off with the FRB and FDIC on resolution topics, and was a major contributor to the SG Group Recovery and Resolution plans required under the ECB/SRB mandates. I also led SG’s EPS effort, including establishing a US IHC, and building out the US capital, liquidity, risk and governance frameworks. My current focus is on rationalizing regulatory requirements into sustainable BAU processes.

Can you explain the changing criteria for lower risk institutions?

From inception in late 2011 when the agencies finalized their joint rule implementing resolution requirements for the largest banks (>$50 billion in consolidated assets) under Section 165(d) of The Dodd-Frank Act, banks were split into waves/groups based on size and this defined the implementation timetable. The largest (Waves 1 and 2), comprised the major US banks and largest foreign banks operating in the US, with the rest grouped into Wave 3. The regulators have subsequently refined these groups and amended the guidance to reflect differences in significance and structure, and have significantly increased requirements for the largest, and relaxed requirements for the smallest.

At the Recovery & Resolution USA Congress, you will be speaking on your insight regarding ‘Discussing the regulatory uncertainty around level of expectation for FBOs and preparation ahead of extended 2018 submission.’ Why is this a key concern right now? And what are the essential things to remember?

In August 2017, the regulators extended the filing deadline for the 20 remaining Wave 3 FBOs till December 2018, in order to allow time to incorporate the new requirements.  No timeframe was given for when the requirements would be provided. Five months have elapsed since, significantly shortening the available timeframe, and significant structural differences exist between FBOs with IHCs and those without, leading to significant uncertainty as to what is required.

What in your opinion is the best way for financial institutions to manage obtaining funding from home office with unfinalized regulations?

There is no generic best way to fund. The best approach will vary by institution based on its legal entity and capital structure and whether it is required to meet TLAC and NSFR rules.

Can you please give a brief overview of the impact of implementing final requirements in shortened timeframe?

Given the uncertainty and structural differences within the remaining group of 20 FBOs, organizations have taken different approaches with some moving ahead and others adopting a “wait and see” approach. The delay in announcing requirements will likely result in organizations experiencing differing levels of difficulty in meeting requirements once announced, and hence costs to comply.

You will be joining a panel discussion alongside Morgan Stanley, Citi, and Credit Agricole to explore how recovery and resolution planning has shifted firm perspective from the business line to legal entities creating a simplified view. What do you believe will be the key talking points, and why?

Business lines often span legal entities, and with resolution focused on sustaining business activities so as not to disrupt the markets, and allowing for an orderly wind down or sale of activities, the legal entity and inter entity dependencies become the key focus. This requires a much better understanding of these dependencies, splitting of business entities from support entities, and ensuring that adequate capital and liquidity is available to ensure an orderly process. For Foreign Banks this also presents additional difficulties due to differences between home country and US regulations.

How do you see the recovery and resolution industry evolving over the next 6-12 months?

I think we are in a period of stabilization, where the focus will be on enhancing what is in place and rationalizing resolution and recovery requirements with the BAU processes for capital, liquidity, risk and governance required by other DFA requirements (EPS and CCAR). For Foreign Banks, this will also require greater cooperation between the home country and US regulators to converge requirements and interdependencies.