WASHINGTON — Forcing the largest banks to submit their own plans to regulators on how they could be dismantled in the event of a crisis was supposed to be a key way to end "too big to fail."

But eight months after the most complex banks filed their second round of "living wills" — and just two weeks before they are supposed to submit updates to those plans — they have yet to hear any formal feedback from regulators on how they did the last time around.

The Federal Deposit Insurance Corp. and Federal Reserve Board are said to be nearing a response, but it is unlikely to come before the early July deadline for the next round of submissions. The reasons for the delay include the difficulty of getting the agencies to agree on joint reviews and the sheer complexity of the resolution plans. But banks are said to be hoping soon for feedback to help determine what revisions they should be making.

"The absence of individualized feedback has prevented the dialogue that should be an integral part of the process so that there can be better mutual understanding about needed improvements so that it is an evolutionary process to make sure that companies and regulators are responding to any issues," said Michael Krimminger, a former FDIC general counsel and now a partner at Cleary Gottlieb Steen & Hamilton LLP.

The Dodd-Frank Act tackled "too big to fail" in several ways, including giving regulators the power to seize and unwind a failing large bank. But the financial reform law also sought to make firms easier to clean up in a traditional bankruptcy. Under the statute, banking companies with over $50 billion in assets — and "systemically important" non-banking firms — must plot their own wind-downs annually. A resolution plan judged not "credible" by the Fed and FDIC results in remedial action. If they are still not satisfied with later revisions, the regulators can force the firm to divest assets to make them more "resolvable."

It is still early in the process and the agencies have said that all of the roughly 130 firms which submitted plans would get a passing grade for their first living wills.

But the 11 banks considered most complex were required to turn in a second batch of plans last year that regulators said were being graded more thoroughly.

"Unlike the first round, this round of plans will be subject to evaluation under the standards of the statute, which is resolvability under bankruptcy," FDIC Chairman Martin Gruenberg said in December. "I view that … as an important work in progress and in some sense the first real test of this process."

A third round of plans is due in July, but the FDIC and Fed have yet to provide feedback to banks on how their second round plans were viewed. What has sparked the holdup is unclear, though the Fed and FDIC — agencies with different missions — have been known to butt heads in trying to resolve differences over past interagency projects.

"As in any discussion of something this new and complex, there will of course be different views. But we're working through those," said Arthur Murton, who runs the Office of Complex Financial Institutions, the FDIC division managing the new resolution work. "The FDIC and the Fed are working cooperatively to get through those issues and decide what feedback to give the firms. We're hopeful we will be providing the firms with feedback in the near future. We think that will be an important next step in the process."

In a brief statement emailed to American Banker, the Fed said, "We are working closely with our colleagues at FDIC on our common goal of ensuring that large banking organizations are able to be resolved if needed."

Also complicating the process is that the two agencies are both prone to their own internal debates, since each is run by a board of directors bringing varying views to the table. FDIC Vice Chairman Thomas Hoenig is the loudest public voice at either agency for using the living wills process to ensure big banks can be unwound through bankruptcy. In a recent speech, he said regulators "should be prepared to require an institution" lacking a credible plan "to sell assets and simplify operations until it shows itself to be bankruptcy compliant." Others may want to move more cautiously.

"The reasons it is taking time are there is more than one agency [and] you have a very complex set of institutions with very complex issues. … I can't say there is a simple way of doing this," said Hoenig in an interview. "Judging what is adequate is no simple matter either. That's caused a lot of time but I think it has to come to an end. We have to make a decision eventually, sooner rather than later."

He said it is helpful to have two different agencies evaluating the plans to formulate a balanced response. "That's why both were given the responsibility — to get both points of view in the mix. It adds perspective and thoroughness, but it also adds time," he said.

Yet it is appearing increasingly likely that, as a result of the delay, the feedback will have no bearing on the 11 companies' next set of revisions, due next month. (Murton said the agencies "haven't committed to a timeframe at this point" on when they will release feedback.)

Even if the two agencies issue a response this month, it would probably have no impact on the third round plans since the banks are said to be putting the finishing touches on their upcoming filings.

"It just became too late. The deadline is July; basically you have to provide some feedback at least three months before the next set of plans are due," said a former regulator speaking on the condition of anonymity. "I can envision how developing a consensus [among the regulators] would take time, although I am somewhat surprised that there appears not to have been any feedback submitted on the second round plans."

Yet others defended the agencies, saying a correct response by the regulators is better than a quick one, and the regulators have faced huge demands from other assignments mandated by the 2010 reform law.

"These are enormous plans. … These are not easy questions," said H. Rodgin Cohen, senior chairman at Sullivan & Cromwell LLP. "They're novel issues. Everybody would like feedback, and hopefully there will be significantly more feedback before there are any final determinations made [on] what views the regulators have about the plans. But it's hard for me to fault the regulators for taking the time that they need.

"This is one of a wide number of huge projects which the agencies have. They do need to sleep too."

A key question for the regulators, in addition to how they evaluate the plans, is how quickly they will demand fixes for subpar plans. Under current regulation, the Fed and FDIC can issue a "notice of deficiency" for a plan that does not credibly lay out a how a firm would be resolved through bankruptcy. That starts a process requiring the bank to submit changes. If the revision is still not adequate, the regulators can impose new capital, liquidity and growth restrictions. If further revisions still do not satisfy the regulators, they can order the bank to divest certain assets.

Some have urged the agencies to use these early rounds of the process to communicate to banks more about their expectations for the living wills before actually giving a bank a failing grade, which can have serious consequences.

"There is a distinction between a formal credibility review and real feedback on the plans. It would be irresponsible for the regulators to move straight to a credibility review without having first given real feedback," said Margaret Tahyar, a partner at Davis Polk & Wardwell LLP.

Hoenig countered that Dodd-Frank designed the process to be deliberate — with banks able to improve their standing in multiple revisions — so that even if a bank received a poor evaluation this year, it could take as long as four years for regulators to order serious changes at the institution.

The law "is structured to make sure that it doesn't happen too quickly. There is first a notice of deficiency, and then there is an opportunity to respond to that," Hoenig said. "The process for divestiture would also take time, to identify assets. That's a multi-year process right there. Congress knew that they want it to take time. I don't think they were naïve about that."

But he added that regulators should not put off utilizing the authority Congress gave them.

"We ought to take our lessons and we ought to move forward with this to make sure that these institutions are accountable and are resolvable," he said.

Still, the lack of feedback yet from the agencies has caught many off guard.

"This has been frankly very surprising to me. I had hoped there would be a greater dialogue with the banks," Krimminger said, yet he added that the regulators are expected to issue a response soon. "I understand that the regulators are very close to being able to provide additional guidance. I hope to see a dialogue between the regulators, and the companies, so that the banks can begin to understand the perspective of the regulators and vice versa."

Murton said the agencies are just trying to calibrate the appropriate response. "The most important thing is getting the right feedback to the firms and making it as meaningful and as constructive as possible," he said.

Joe Adler is the Deputy Washington Bureau Chief for American Banker.

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