Regulators Propose Rules for “Living Wills” of Covered Financial Companies: Implements Dodd-Frank Act Requirement That Bank Holding Companies with $50 Billion in Assets and Designated Nonbank Financial Companies Prepare Detailed Resolution Plans and Credit Exposure Reports

Sullivan & Cromwell LLP - April 19, 2011

The Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System have approved a notice of proposed rulemaking to implement the “living will” requirements of Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 165(d) requires submission and regular periodic updating of “living wills” from large bank holding companies, certain foreign banking organizations and those nonbank financial companies determined to be subject to Federal Reserve supervision because of their potential to pose a systemic risk to U.S. financial stability. These entities must periodically report to U.S. financial regulators on their plans for “rapid and orderly resolution in the event of material financial distress or failure” under the U.S. Bankruptcy Code in a way that would not pose systemic risk to the financial system, as well as report on their credit exposures to other large financial companies. The regulators have authority to review and require revisions of resolution plans that they do not deem “credible” or likely to facilitate an orderly resolution under the U.S. Bankruptcy Code, and the regulators have discretion to impose penalties, including heightened capital and liquidity requirements, restrictions on activities and, ultimately, forced divestitures, on entities whose plans fail to satisfy applicable regulatory requirements.