Five of the nation’s biggest banks failed a key Dodd-Frank requirement that would make it easier for regulators to oversee a bankruptcy and avoid another big bank bailout, regulators said today.
The FDIC and the Federal Reserve board said that the 2015 resolution plans, or so-called “living wills,” of Bank of New York Mellon, JP Morgan Chase, Bank of America, State Street and Wells Fargo were “not credible” or “would not facilitate an orderly resolution under the U.S. Bankruptcy Code.”
“No [global systemically important banking organization] has yet shown how it would successfully address all phases of a successful bankruptcy if its failure were imminent,” FDIC Vice Chairman Thomas Hoenig said in a statement. “Weaknesses vary by individual firm and include, for example: how a firm determines when to enter bankruptcy; how its resolution strategy aligns with bankruptcy court processes; whether there is adequate liquidity and debtor-in-possession financing; and how it would pass capital to operating units in anticipation of bankruptcy.”
Some of the banks in question issued statements responding to the results and promising to work with their regulators toward fixing those deficiencies.
“We were disappointed to learn that our 2015 resolution plan submission was determined to have deficiencies in certain areas,” Wells Fargo said in a statement. “The Federal Reserve Board and the FDIC acknowledged the continued steps Wells Fargo has taken in enhancing its resolution plan and we view the feedback as constructive and valuable to our resolution planning process.”
State Street also issued a statement saying it would work on addressing those deficiencies identified by regulators.
The banks now have until Oct. 1 to address the problems with their plans. If those plans fail once again, regulators could force them to raise capital levels or otherwise curtail their activities. If after two years, the banks still do not satisfy those regulatory requirements, the agencies could require them to sell off certain assets or business lines or even resolve via bankruptcy.
The regulatory agencies identified weaknesses in Goldman Sachs’ and Morgan Stanley’s living wills, but they did not come to a joint decision on those two. The FDIC identified deficiencies with Goldman Sachs’ plan, while the Fed identified deficiencies with Morgan Stanley’s plan.
The Fed and FDIC identified shortcomings with Citigroup’s living will, but its resolution plan otherwise passed the regulators’ requirements.
