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Understanding a Bank's "Living Will"
Maximum Risk Management

In a Q&A in advance of his appearance at the upcoming Enterprise Risk Management in the Banking Industry Conference, Michael Fadil, SVP, Corporate Risk Management at SunTrust Bank, talks about enterprise risk management, the key highlights of a bank "living will" and the importance of understanding "interconnectedness."

What, in your opinion, are the key points of a bank 'living will'?
MICHAEL FADIL: The Notice of Proposed Rulemaking six areas that each plan needs to address: the strategic analysis of the components, the governance structure for resolution planning, the organizational structure, MIS, the interconnections and interdependencies within the company, and supervisory/regulatory information. One theme that does weave through all aspects of the plan is the issue of interconnectedness. This comes in many forms - interconnection of businesses, legal entities, systems, people, processes and internal financing arrangements. Additionally, adding to the complexity is that most of the interconnectedness of each of the above is intertwined with the other dimensions. Having an ability to understand and clearly articulate this multi-dimensional interconnectedness will be important to adequately deal with each of the six major sections.

In theory, most institutions should have 80 - 95% of the information being requested. 

On a different note, given the complexity of the above challenges, being able to update the plans when required, but no less than annually, requires balancing the amount, organization, and presentation of the living will plans with a plan that is sustainable. It must be well understood.

What role will living wills play in sound risk governance and risk management?
FADIL: A bank's recovery and resolution plan is a way to articulate and document that a financial institution understands the intricacies of the interconnected nature of businesses in the organization. In theory, most institutions should have 80 - 95% of the information being requested. The reality is that even though most do, it is spread across dozens of key individuals in the institution and not well organized.

Recently, during the great recession, the inability of many institutions to easily understand the interconnectedness of businesses probably exacerbated the negative impact on the institutions themselves and on the entire global financial system. The process of organizing this information centrally and clearly articulating how all of the pieces are interconnected will help ensure that an institution understands the complex nature of various aspects of the business and thereby advance risk management and governance at most financial institutions. A key question that remains outstanding, however, is what standard of documentation will be considered appropriate and will that level be so high where the costs outweigh the benefits that a financial institution will receive.

How tough a hurdle is it that living wills must receive approval by both the FDIC and the Federal Reserve Board?
FADIL: The approval hurdle from the FDIC and Federal Reserve Board remains to be seen. The NPR does articulate "minimum content" requirements, but beyond that it only states that the plans must be "credible." One of the issues that many banks and industry groups have brought up is that the standards for submission of a successful plan are vague and overly broad and need to be made more objective.

How effective, overall, will living wills be - can even the best, most timely plans anticipate the next crisis?
FADIL: One needs to separate the recovery plan component of living wills from the resolution plan component. Few, if any, would assert that the resolution plan will help anticipate the next crisis. Some, however, will make that assertion regarding the recovery plan.

I would argue that in and of itself, the recovery plan will not and should not necessarily be effective with regard to anticipating the next crises; rather, it will ensure that financial institutions are anticipating how they would think about the organization as a crisis begins to become evident. I would describe the recovery plan as a well articulated understanding of each business, the value of the business in various scenarios, and how the business is interconnected to any legal entity or other business, with regard to financial arrangements, people, systems, and processes across the institution, especially in those instances where people, systems and processes are shared. This type of detailed understanding should create a well-understood escalation process that articulates the way in which an institution will manage during the height of a future crisis.

This in conjunction with other practices that have gained renewed emphasis in the past three years (for example stress testing, capital planning, and contingent liquidity planning) should help individual banks and the financial industry in aggregate negotiate the next crisis better; however, it probably will not help specifically anticipate the next crisis.

Michael Fadil, SVP, Corporate Risk Management at SunTrust Bank is a speaker at the upcoming Enterprise Risk Management in the Banking Industry Conference taking place on July 14-15, 2011 in New York City, NY.

Fadil joined SunTrust in May 2006 and is currently at work on special projects for the Chief Risk Officer after working for 4.5 years as the Head of Risk Analytics, overseeing Wholesale Transaction Modeling, Economic Capital and Portfolio Modeling, Allowance for Loan and Lease Losses, Commercial Portfolio Loss Forecasting, Corporate-Wide Stress Testing, and Model Validation. All responses represent the view of the Mr. Fadil and not necessarily those of SunTrust Bank.

The Marcus Evans Enterprise Risk Management in the Banking Industry Conference will take place on July 14-15, 2011 in New York City, NY. To learn more, please visit this site.



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