The Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation have ordered 11 of the largest banks in the country to fix their so-called “living wills,” which must lay out each bank’s plan for the “rapid and orderly resolution in the event of material financial distress or failure of the company.”
According to a joint release from the Fed Board and the FDIC, the living wills of Bank of America (BAC), Bank of New York Mellon (BK), Barclays (BCS), Citigroup (C), Credit Suisse (CS) , Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) , State Street (STT) , and UBS (UBS) fall short of the expectations laid out in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“In theory, Title I (the living will provision) solves too big to fail,” said Thomas Hoenig, FDIC vice chairman. “However, in practice, it’s not the passage of a law but rather its implementation that determines whether the issue is resolved.
“The living wills before us fail to fully acknowledge these issues and ignores other operational issues. They demonstrate little ability to cope adequately with failure without some form of government support. The economy would almost surely go into crisis.”
The Fed Board and FDIC said that the banks’ living wills each carried some deficiencies, but there were several “common features” that were left unaddressed by the current plans.
Those shortcomings include:
In letters sent to each of the 11 banks, the Fed Board and FDIC addressed the banks’ respective living wills and ordered the banks to make the appropriate changes and submit a new living will on or before July 1, 2015.
Among the specific actions that the banks are required to undertake are:
“Today, the FDIC and Federal Reserve have taken the most important step to date in this process by issuing joint letters to the eleven largest, most complex banking organizations, directing them to make specific substantive changes to facilitate their orderly resolution in bankruptcy,” FDIC Chairman Martin Gruenberg said in a statement.
“The actions the firms are being directed to take include changes to simplify their legal structures, amendments to their derivative contracts to prevent disorderly terminations during resolution, and actions to ensure the continuation of critical services throughout the resolution process,” Gruenberg continued.
“These letters provide a set of changes for the firms to implement which will make a meaningful difference in the ability to resolve these firms in an orderly manner in bankruptcy, and reduce the risk they pose to the financial system.”