Dive Brief:

• The Federal Deposit Insurance Corp. on Friday said it’s made changes to its approach to large bank resolution planning, including scrapping the requirement for banks to use bridge bank strategies.
• Modifications reflect the regulator’s intent to focus the resolution planning process “on the operational information most relevant” for the FDIC to resolve a big bank through a weekend sale or operate a lender for a short period of time while quickly marketing the bank, the agency said in a news release.
• “The 2023 bank failures served as a reminder of how costly and damaging a bridge bank solution can be,” FDIC Acting Chair Travis Hill said in the news release. “Today’s action is one step in shifting our approach towards maximizing the likelihood of a lower cost and more stabilizing resolution for large regional banks.” 

Dive Insight:

Hill previewed the changes earlier this month while speaking at an American Bankers Association summit in Washington, D.C., saying the FDIC would still require resolution plans but would waive several requirements of living wills. 

The intention is to “deemphasize and broaden the ‘strategy’ discussion” and forgo the expectation that banks build plans around a hypothetical failure, in favor of plans focused on supplying the FDIC with the information it needs to swiftly market failed banks and briefly operate them if needed, Hill said.  

The FDIC’s 2024 updates to its resolution planning rule “incorporated the wrong lessons from the 2023 bank failures,” Hill said at the April 8 summit appearance. 

That the amended rule revolved entirely around entering and exiting a bridge bank was problematic, he said, since Silicon Valley Bank and Signature Bank each experienced deposit runs after failing and reopening as bridge banks, which “subtracts from the failed institution’s franchise value, and increases the cost of failure” to the FDIC’s Deposit Insurance Fund.

For large banks, the main goal “should be maximizing the likelihood of the optimal resolution option, which experience has demonstrated to generally be a weekend sale,” Hill said. 

The FDIC’s resolution planning requirements apply to banks with $50 billion or more in assets, based on a four-quarter average. Once a bank crosses the asset threshold, it’s given at least 270 days to submit a full resolution plan, or living will.   

Instead of requiring a bridge bank strategy to facilitate a resolution, the regulator wants large banks to describe one or more potential resolution strategies the FDIC could reasonably execute in different circumstances. Banks should share key elements rather than a “lengthy narrative,” and the FDIC and the bank can discuss possible resolution options, according to answers to frequently asked questions the FDIC issued alongside the announcement of the changes.

The FDIC is also scrapping its requirement that banks include a hypothetical failure scenario.

The regulator also revised its definition of “key personnel,” noting it includes those with a job, responsibility or knowledge that could be significant to the FDIC’s resolution of the bank, but doesn’t cover anyone who could be “easily replaced.” Additionally, the FDIC updated how lenders should classify parts of their business that could be sold in connection with a resolution.

The regulator also waived a requirement of quantitative analysis related to valuation, although banks must still provide a qualitative description of how they would determine values of franchise components and the bank as a whole, and they don’t have to project how economic effects might be addressed in certain scenarios. 

Resolution capabilities testing won’t occur before 2026, when the FDIC will initially evaluate whether a bank offers information that supports the regulator’s ability “to market and execute a timely sale or disposition” of the lender. 

As the FDIC continues to evaluate other provisions of the rule and how they apply to different groups of banks, the agency said it may put forth additional updates in the future.