The Federal Reserve has issued a supervisory letter stipulating standards to ensure rapid recovery at the eight U.S. BHCs designated as global systemically-important banks (G-SIBs). These G-SIBs are already required to endure orderly resolution under the Bankruptcy Code and, most recently, have been found wanting in this regard. Here, the FRB not only ramps up recovery planning in concert with pressure on resolution, but links the two activities together by demanding that domestic G-SIBs demonstrate they can also recover from operational risks that might force resolution action absent this resilience. As in the living wills, G-SIBs are required to construct recovery plans that presume no access to extraordinary governmental support. Also like living wills – and of particular importance here given the agencies’ rejection earlier this summer of many of them – G-SIBs must now plan to separate themselves, divest operations, or otherwise restructure not only if stress affects solvency or liquidity, but also operational resilience. Differentiating how this is to be done in resolution versus recovery planning and ensuring the FRB is satisfied with the recovery plans that now must be filed with it may thus become as much of a strategic priority as ensuring FDIC/FRB acceptance of the next round of G-SIB living wills. Building on growing policy focus on ensuring also that G-SIBs are financial-market utilities, these recovery plans must now take into account not only the bank’s ability to recover under operational or market stress, but also ensure its continuing ability to support counterparties, clearing agencies, and other parties so that financial stability is broadly assured in concert with its own resilience.
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