Regulators Reject ‘Living Wills’ of Five Big U.S. Banks

Source: WSJ

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Federal Reserve building in Washington, D.C. PHOTO: REUTERS

Fed, FDIC rebuke bankruptcy plans of J.P. Morgan, Wells Fargo, Bank of America, Bank of New York, State Street

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WASHINGTON—Regulators ordered five big U.S. banks to make significant revisions to their so-called living wills by Oct. 1 or face potential regulatory sanctions, a stern warning that will fuel criticism the firms are “too big to fail.”

J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Bank of New York Mellon Corp., and State Street Corp. were told by the Federal Reserve and the Federal Deposit Insurance Corp. that the regulators felt their plans for a possible bankruptcy don’t meet the legal standard laid out in the 2010 Dodd-Frank law, which requires that firms have credible plans to go through bankruptcy at no cost to taxpayers

They said those firms had until October to present plans regulators find acceptable, or the agencies or regulators could impose higher capital requirements, restrictions on growth or activities, or other sanctions.

Bank stocks, however, rallied in recent trading, led by J.P. Morgan, which reported smaller-than-expected declines in earnings and revenue for the first quarter despite difficult trading conditions.

The regulators split in their assessments of Goldman Sachs Group Inc. and Morgan Stanley. The FDIC said that Goldman Sachs’s plan didn’t meet the legal standard, while the Fed didn’t give that negative assessment.

Regulators have ordered five large U.S. banks, including J.P. Morgan Chase and Wells Fargo, to make significant revisions to their so-called living wills, which will, in theory, prevent them from becoming “too big to fail.” Here’s a look at the logic behind a living will. Photo/Illustration: Heather Seidel for The Wall Street Journal.
The two regulators took the opposite stance on Morgan Stanley. The Fed “identified a deficiency” in Morgan Stanley’s plan that it said didn’t meet the legal standard, but the FDIC didn’t go that far, the agencies said in a news release.

Citigroup Inc. was the only firm whose plan wasn’t rejected by either agency, though the Fed and FDIC said the firm’s plan had “shortcomings that the firm must address” by July 2017.

The living wills had been submitted by the eight U.S. banks that had been deemed “systemically important financial institutions,” or SIFIs, that are seen as being so large that their distress could put the economy at risk.

The agencies “are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers,” said FDIC Chairman Martin Gruenberg in a statement Wednesday. “Today’s action is a significant step toward achieving that goal.”

Overall, the regulators were less harsh in their assessments on the Wall Street-focused firms than on the universal and commercial banks.

While officials say they are imposing a much-needed new caution on a financial system that collapsed eight years ago, critics say that the tight leash they have attached to the largest banks may be undermining the sector’s recovery, imposing new rules that discourage lending, crimp market liquidity, and erode bank profitability.

John Dearie, acting chief executive of the Financial Services Form, a trade group representing all of the large banks’ CEOs except Wells Fargo, issued a statement Wednesday describing the regulators’ concerns as “technical shortcomings” that the industry is committed to address.

J.P. Morgan said on a call with reporters Wednesday the bank was disappointed in the results but will work with regulators to understand feedback in more detail. “If other firms can satisfy [regulators on living wills] then I’d be surprised if we can’t,” Chief Executive James Dimon said.

Wells Fargo, which had previously received more positive feedback than other firms, was found to have made “material errors…that undermine confidence” in its preparedness for bankruptcy.

Wells Fargo said in the statement the firm was disappointed in the results and will address regulators’ concerns. Regulators “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,” the statement said.

Among the other banks graded, the regulators said that Bank of America needs to improve its computer models and processes estimating liquidity needs and clarify its “triggers” declaring bankruptcy.

Bank of New York had insufficient analysis to support its bankruptcy strategy and hasn’t made enough progress simplifying its structure of legal entities, regulators said.

State Street was also faulted for problems its structure and “questionable assumptions regarding capital levels needed to execute the resolution strategy,” regulators said.

Goldman, Morgan Stanley, and Citigroup won’t need to show they have addressed the regulators’ concerns until July 2017, when all eight firms will file fully revised plans.

The regulators said Goldman and Morgan Stanley fell short on processes for determining how much liquidity their various units would need to sustain themselves once their parent filed for bankruptcy protection and didn’t offer enough details on plans to wind down the derivatives contracts.

While Citigroup’s plan fared best among the eight, regulators said that, among other things, it does need to develop a more detailed playbook outlining how it would go through various stages of the bankruptcy process, regulators said.

Big bank critics applauded the regulators’ verdict, but also said further crackdowns on the firms would be required to avoid future bailouts.

FDIC Vice Chairman Thomas Hoenig, who has been much more critical of the banks than FDIC Chairman Gruenberg, issued his own statement saying that even if the firms have credible living wills, the plans still don’t show the firms are strong enough to weather a major crisis on their own, including a crisis where multiple huge banks fail.

“The goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal,” Mr. Hoenig said in a statement Wednesday.

—Justin Baer, Emily Glazer, Christina Rexrode, and Rachel Louise Ensign contributed to this article.

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