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Five major banks fail bailout test, would need taxpayer money in crisis

Bank of America, JPMorgan Chase, Wells Fargo, others must improve 'living wills'

Five of the nation’s largest banks are not prepared for a financial crisis and would need taxpayer bailouts, the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation announced Wednesday.

According to multiple reports (including Reuters), the “living wills” of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo are “not credible.”

The “living will” test is a stipulation of the Dodd-Frank Wall Street Reform Act, and requires banks to provide plans on how they would “fail in an orderly way” in a crisis without requiring money from the public.

But, the “living wills” of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo are not sufficient and need adjustments, or the bank's will face stricter regulation.

According to a release from the Federal Reserve, each bank must address the deficiencies in its “living will” plans by Oct. 1, 2016. If the bank has not completed those adjustments, “it may be subject to more stringent prudential requirements,” the Fed said.

According to a report from FBR & Co., those more strict requirements could include more stringent capital, leverage, or liquidity requirements, as well as restrictions on growth, activities, or operations of the firm, or its subsidiaries.” Ultimately, regulators could force divestment of “certain assets or operations,” FBR’s analysts noted.

FBR’s analysts also noted that the Fed and FDIC also found the resolution plans of Goldman Sachs and Morgan Stanley to be deficient but did not jointly find them “not credible,” as they did with the other large banks.

Citigroup was the only bank to clear the “living will” test, but the Fed and FDIC noted that Citi also has some “shortcomings” that need to be addressed.

But the FBR analysts state that there are still some issues surrounding these tests.

“In our view, there is considerable subjectivity to the living will process that allows the regulators to have another shot at shaping individual banks into the mold they believe comes with the acceptable level of risk,” FBR’s analysts noted Wednesday.

“This is especially true given the opaque nature of the process and the potentially severe consequences of failing to have a resolution plan deemed credible,” they continued. “We note that the ability of Citigroup to clear the hurdle set by regulators should give some comfort in the ability of banks to make changes by the October 1 deadline set by regulators to correct deficiencies.”

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