Financial reform this week: TBTF banks weigh in on plan for “living wills”

Introduction

The so-called Too Big To Fail banks will weigh in this week on a Federal Deposit Insurance Corp. proposal that would require each to compose a living will detailing how it could go out of business in an orderly manner without threatening the rest of the U.S. financial system.

Friday is the deadline for comments from TBTF banks – those with $50 billion or more in assets – and from the rest of the public. The proposed rule requiring the contingency plans would also apply to non-bank financial companies that are supervised by the Fed.

Under the proposal, each mega-bank would be required to annually file a living will that has been approved by its board of directors. Each living will must include derivatives and hedging instruments used by a bank; a detailed inventory of its management information systems and applications; a map of its subsidiaries and interdependencies; and quarterly updates of a bank’s credit exposure.

“The ability to plan in advance for the orderly resolution of a systemic entity is key to ending Too Big To Fail,” FDIC Chairman Sheila Bair said in late March when she announced the proposal. “These plans will be instructive to institutions as a way for them to better understand how their business lines interact and how to mitigate the effects of failure risk.”

Bair’s term as FDIC chairman expires early next month, and no successor has yet been nominated by the Obama administration.

Other Congressional hearings, rulemaking deadlines and events related to the Dodd-Frank reform law this week:

Monday, June 6

Forex exemption – Deadline for public comments on the Treasury Department’s proposal to exempt of forex swaps and forwards from derivatives regulations.

Wednesday, June 8

Swaps recordkeeping – Commodity Futures Trading Commission holds public roundtable to discuss infrastructures to issue and maintain “unique product identifiers” for swap data recordkeeping. Begins at 1300 ET and is available to remote participants via a listen-only telephone line at 866-844-9416, passcode 3463239.

Thursday, June 9

Swaps reporting – Deadline for public comments to the Commodity Futures Trading Commission on its proposal for swaps reporting and recordkeeping requirements.

Friday, June 10

Banks’ living wills – Deadline for public comments on a Federal Deposit Insurance Corp. proposal to require systemically important big banks and large non-bank financial companies to submit annual “living wills” that lay out how the company would be unwound rapidly in bankruptcy during a financial crisis. The proposal would also require each company to submit quarterly reports of credit exposure to other big companies.

Mortgage risks – Deadline for public comments on U.S. banking regulators’ proposal to require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities. The proposal would not include asset-backed securities of “qualified residential mortgages,” which set standards for downpayment terms, a borrower’s credit history, and loan-to-value ratio.