Regulation Review: “Resolution Plans” and “Stress Test” Rules

Dodd-Frank implementation marches on into 2012. Yesterday the Federal Deposit Insurance Corporation (FDIC) finalized one rule and proposed another implementing Dodd-Frank.

The final rule establishes the framework for “Resolution Plans” for institutions with more than $50 billion in total assets.  A resolution plan (or “living will”) is a report from a covered entity on how it expects to unwind its assets should it fail and fall into FDIC receivership.  The rule applies to 37 institutions.

The FDIC regulation has been in effect since January 1.  No, there is not some temporal distortion at work, but rather a slick rule-making technique employed in numerous other Dodd-Frank rules.

A virtually identical “interim final rule” version was published in September 2011.  Citing the “broad authority” granted by the FDI Act, FDIC was able to bypass the regular Administrative Procedure Act process.  Today’s rule is simply an administrative formalization as there are no substantial differences between the two versions.  This “formal” version is technically effective April 1, the beginning of the next financial quarter.

The proposed rule sets the parameters for an annual “Stress Test” for institutions with more than $10 billion in total assets.  A stress test is a report from a covered entity on how well prepared its balance sheets would be for an array of hypothetical, macro-level financial scenarios.  This provision would apply to 23 institutions.

On costs and benefits, both rules only estimated the paperwork burden hours involved:

• Resolution Plans:
• 266,400 hours to create original plan
• 25,086 hours in annual updates
• 291,486 total burden hours (minimum).

• Stress Tests:
• 46,000 hours for initial report
• 23,920 hours for each subsequent year
• 69,920 total burden hours (minimum).

• Total: 361,406 burden hours

Assuming an hourly rate for financial compliance officers of $100 per hour (an estimate given in numerous Dodd-Frank rules), these two regulations would cost a minimum of $36.1 million.

That number may pale in comparison to so many of this administration’s regulations, but these rules are just one small piece of Dodd-Frank’s regulatory puzzle.  A recent GAO report regarding Dodd-Frank’s global impact noted that “industry experts” remain concerned over a host of issues, including the “resolution of insolvent financial firms.”  Given the burden from these two FDIC rules, the industry is right to be concerned.