Overview of Dodd Frank Recovery and Resolution Planning
A S N A P S H O T O F D O D D - F R A N K : R E C O V E R Y A N D
R E S O L U T I O N P L A N N I N G
DODD-FRANK TITLE I AND TITLE II:
RECOVERY AND RESOLUTION PLAN
LEWIS ADAMS, MBA, CISA,
CRISC, CGEIT, CISM
BACKGROUND OF DODD-FRANK
RECOVERY AND RESOLUTION PLANS…
As a result of the Global Financial Crisis of 2008, various legislaPon was developed and implemented around
the globe in the form of regulaPons. One of the key regulatory items passed by the 111th Congress of the
United States, and signed into law in 2010, was H.R. 4173, commonly referred to as the “Dodd-Frank Wall
Street Reform and Consumer ProtecPon Act”. The ﬁnal rule in the Act, SecPon 165, required Systemically
Important Financial InsPtuPons (SIFI) with assets meePng a certain threshold and nonbank ﬁnancial companies
designated by the Financial Stability Oversight Council (FSOC) for oversight by the Federal Reserve, to create
and submit Recovery Plans and ResoluPon Plans to the FDIC and the Federal Reserve. In the United States, the
threshold was established at $50 billion in consolidated assets.
Ø The preparaPon, content, and delivery of Recovery and ResoluPon Plans (RRP), along with the
accompanying process and oversight of G-SIFI and FSOC-designated Bank Holding Companies (BHC’s)
addresses how the ﬁrm will systemaPcally manage execuPve and operaPonal funcPons during and afer a
period of distress. Two speciﬁc areas are intended to be addressed in the plans:
• Recovery: What are the ﬁrm’s plans to recover from various distress scenarios.
• ResoluPon: What are the ﬁrm’s plans for resoluPon (liquidaPon) should this become necessary, with material
ﬁnancial distress or failure of the company, and include both public and conﬁdenPal secPons.
Ø The underlying driver of Dodd-Frank and speciﬁcally SecPon 165, is to miPgate risks to the United States
and the global economy that could arise from material ﬁnancial distress or failure of large, interconnected
H.R. – House ResoluPon – United States House of RepresentaPves
RECOVERY PLANNING -
Create a menu of choices, at granular levels, to respond to a full of operaPonal and ﬁnancial
stress conPnuum. Stress tests should cover the enPre stress conPnuum.
Recovery Planning should be coordinated with other conPngency planning and risk monitoring
pracPces (e.g. around liquidity, capital, operaPonal, strategy).
Recovery Planning should factor both internal and external stresses and impact to
counterparPes, creditors, clients, depositors, and overall market.
Very granular governance is required around planning and execuPon of each recovery opPon,
with involvement and accountability of senior management and board of directors.
• RaPngs Downgrades
• Revenue Reports or P&L (or derivaPve)
• Credit Risk Limits
• Equity RaPos
• Per Cent Renewal of Wholesale Financing
• Withdrawal of Deposits and Other Funding
• Increased Collateral Requirements
• Rise In Public Debt
• GDP Forecasts
• 3-Month LIBOR
• Senior Debt Spreads
RECOVERY PLANNING STRESS
• Signiﬁcant capital and liquidity impacts
• Severe losses through a rogue trader
• RaPngs downgrades
• A Euro or US dollar crisis
• GDP growth rates
• Loss of goodwill
• Exodus of talent
• Signiﬁcant deposit withdrawal or runoﬀ
• Collapse of global ﬁnancial markets
• Currency rates
• Commodity process
RESOLUTION PLANNING -
Create a plan, or living will, to describe the ﬁrm’s strategy for rapid and orderly resoluPon in the event of material
ﬁnancial distress or failure of the company. The scope, condiPons for entry into resoluPon and acPvaPon of the
operaPonal resoluPon plan, and funding arrangements for the proposed plan must be documented also.
ResoluPon Planning should factor and provide analyPcal support for assumpPons, scenarios, strategies, and
related operaPonal details.
Key ObjecPves of ResoluPon Planning: Stability, Accountability, and Viability
Key Challenges: Misalignment of funding, operaPons, business lines, and legal enPPes; Excessive liquidity
requirements; Financial contract close-out and nenng provisions; MulP-jurisdicPonal operaPons; Intragroup
ﬁnancial posiPons and obligaPons; Rapid dissipaPon of franchise value; ExecuPon complexiPes
RESOLUTION PLANNING TWO
Single point of entry (SPE)
• ApplicaPon of resoluPon powers at the top holding or parent company by a single resoluPon authority. This is most likely to
occur in the jurisdicPon that is responsible for the global consolidated supervision of a group.
• Assets and operaPons of subsidiaries are preserved as going concerns, thereby avoiding applicaPon of resoluPon at more
granular levels within the group.
• May require: intra-group arrangements to ensure that losses incurred by subsidiaries are assumed by holding company;
suﬃcient loss absorbing capacity available at holding company level to help ensure that surviving parts of group are solvent
and viable; coordinaPon between host country authoriPes and home country authoriPes to allow resources generated by a
recapitalizaPon at holding company level or made available from other sources to be down-streamed to subsidiaries;
Subsequent clarity as regards the legal, regulatory, accounPng and tax implicaPons of arrangements.
MulPple point of entry (MPE)
• ApplicaPon of resoluPon powers by two or more resoluPon authoriPes (ideally simultaneously) to mulPple parts of the
group, which may include breaking up a group into 2 or more parts.
• The group may be split on naPonal or regional basis, along funcPonal lines, or some combinaPon thereof.
• May require: that the group by divided into two or more separate parts without a signiﬁcant cessaPon of criPcal funcPons; a
degree of legal, ﬁnancial, and operaPonal separaPon within the group, which may require changes to the way groups are
structured, or robust service level agreements to ensure the conPnuity of any criPcal shared services across enPPes subject
to resoluPon at diﬀerent points of entry.
OPERATIONAL RESOLUTION PLAN…
OperaPonal ResoluPon Plan speciﬁes in more detail those
decisions required to implement the strategic approach outlined in
the resoluPon strategy. Such detail may cover the following:
• Processes for deciding on the preferred resoluPon strategy
• ResoluPon powers to support implementaPon of the strategies
• CriPcal funcPons and criPcal shared services
• CondiPons for acPvaPon of resoluPon plans
• Scope – legal enPPes subject to resoluPon
• PotenPal sources of resoluPon funding
• InformaPon requirements
• ValuaPon requirements
• Regulatory and third party approvals
• Appointment of advisors
• Payments, clearing, and seqlement
• Moratoria and stays
• Maintenance of third party contracts and intra-group Service Level Agreements
• CommunicaPon with host authoriPes and other parPes