October 13, 2016 / 1:07 PM / 10 months ago

Fitch: Resolution Plans to Bring Structural Change to US GSIBs

(The following statement was released by the rating agency) NEW YORK, October 13 (Fitch) The updated resolution plans of US global systemically important banks (GSIBs) published earlier this month introduced important structural changes, further codifying the structural subordination of BHC creditors, says Fitch Ratings. Fitch already notches up the Issuer Default Ratings of US bank subsidiaries and other domestic material entities from the bank holding company (BHC). The updated resolution plans are not expected to have immediate or broad rating implications. However, issuer-specific structures, liquidity and double leverage will ultimately influence individual ratings. All eight US GSIBs submitted updated resolution plans to address the shortcomings and deficiencies identified in their July 2015 submissions. The plans are required to be filed annually under the Dodd-Frank Act with the Federal Reserve (the Fed) and Federal Deposit Insurance Corporation (FDIC). Many US GSIBs have struggled to have their plans deemed credible. Failure to do so by the next submission in July 2017 could result in regulatory actions. Six of the eight plans contemplate the creation of intermediate holding companies (IHCs), or changes to existing IHCs, for those banks that have already created them. This is in line with the 2017 guidance on resolution plans from the Fed and FDIC. For those GSIBs contemplating an IHC under their proposed plans, the BHC would likely contribute substantial liquidity to the IHC, which will then hold this liquidity for the benefit of material entities. Importantly, IHCs are not expected to have third-party debt, but rather channel capital and liquidity among material entities and the BHC. The IHC structure is meant to ensure that capital and liquidity do not become unduly trapped in any legal entities, thus improving the likelihood of an orderly resolution. Furthermore, it also solidifies the Fed's source of strength doctrine, as it aims to reduce creditor challenges in a resolution. Most of the plans anticipate including support agreements that allow liquidity to flow to the BHC under business as usual (BAU) terms in order to service BHC debt obligations. Fitch believes that identified nonbank material entities, such as broker-dealer subsidiaries, would benefit from these structural changes as it improves the likelihood of also receiving support from the IHC as a result of support agreements. Fitch expects that if double leverage were to increase but is sufficiently offset by uninterrupted liquidity availability from the IHC under BAU, it will not likely result in any rating action, as debt service capacity will not be deemed impaired. Beyond structural specifics, ratings would also be sensitive if the resubmitted plans do not satisfactorily address noted deficiencies and are deemed not credible. Other aspects of the resubmissions seek to address identified liquidity deficiencies and shortcomings by enhancing resolution liquidity adequacy and positioning and resolution liquidity execution need. Fitch views resolution planning as having additional benefits beyond just outlining a path for orderly resolution. For example, resolution planning has reduced organizational complexity as a result of legal entity rationalization (LER), eliminating thousands of subsidiaries through the process. Coupled with LER, and in response to feedback from regulators, banks have improved their focus on shared services among subsidiaries, improving governance and becoming better able to understand how stress events may affect them. Contact: Christopher Wolfe Managing Director Financial Institutions +1 212 908-0771 33 Whitehall Street New York, NY 10004 Joo-Yung Lee Managing Director Financial Institutions +1 212 908-0560 Justin Patrie Fitch Wire +1 646 582-4964 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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