‘Shortcomings’ uncovered in living wills of 6 of America’s 8 biggest banks
Federal regulators have found “shortcomings” in the living wills of six of America’s eight biggest banks, raising questions about how these lenders would fare during a crisis.
These banks, including Bank of America, Citigroup and Wells Fargo, must fix these “weaknesses” by the end of March, officials said Tuesday.
Post-crisis rules require banks to plan for their own demise. The goal is to prevent the chaos that unfolded in 2008 and 2009 when banks like Bear Stearns, Lehman Brothers and Washington Mutual suddenly imploded.
The good news is that the Federal Reserve and the FDIC on Tuesday said they did not find any serious “deficiencies” in these resolution plans from the biggest banks. And two big banks, Goldman Sachs and JPMorgan Chase, submitted living wills that did not have any issues at all.
However, regulators did flag shortcomings, which are defined as “weaknesses that raise questions about the feasibility of a firm’s plan.” These defects were identified at BofA, Bank of New York Mellon, Citi, Morgan Stanley, State Street and Wells Fargo.
Dodd-Frank, the 2010 financial reform law, requires banks to submit living wills that detail their strategy for a rapid and orderly resolution in case of bankruptcy or failure. Regulators review those plans to determine if they are credible.
In general, officials found that big banks have done a better job of planning for their own demise.
For instance, regulators described “meaningful improvements” in the resolution plans of both Bank of America and Wells Fargo.
However, they also called out shortcomings related to how the banks would operate in a crisis, particularly around their ability to produce the data needed to execute resolution strategies in stressed conditions.
The living wills of both Bank of America and Wells Fargo “did not demonstrate a reliable and timely process” that would give decision makers the necessary confidence to act, regulators said.
In a statement, Wells Fargo said it is “pleased” regulators did not identify any deficiencies in its living will. The bank said it is “committed to continued strengthening” of its resolution capabilities and will address “feedback” from regulators.
BNY Mellon also promised to “work diligently to address the specific areas of feedback” found by regulators.
The living wills are particularly timely given recent concerns about the sustainability of the economic recovery from the Great Recession. Recession fears have repeatedly emerged on Wall Street over the past two years, although economic jitters have recently subsided.
Even though this is now the longest economic expansion in American history, regulators have recently softened some requirements on big banks, including around living wills.
After banks complained the living will process was too burdensome, regulators in October said big banks can now submit a full resolution plan every four years, instead of annually. And every two years big banks must file slimmed-down versions of the living wills.
