Biggest banks face higher bar in next round of living wills

October 2, 2013 05:47 AM

Global banks that failed to convince U.S. regulators last year they could go bust without destroying the financial system got another chance this week to submit plans for a safe demise.

Eleven of the largest lenders including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. were scheduled to send revised living wills to regulators yesterday, and public portions of those plans may be released as early as today. If regulators aren’t satisfied, the government could force the firms to restructure or sell off pieces.

The documents required by the 2010 Dodd-Frank Act are meant to describe hypothetical bankruptcies and bolster perceptions that financial giants can be allowed to go under without causing wider damage. The Federal Deposit Insurance Corp. and Federal Reserve will assess whether the plans are credible as they work to end the notion that some lenders are too big to fail.

“Banks have been working closely with the regulators to craft living wills that will pass muster,” said Jaret Seiberg, an analyst at Guggenheim Partners LLC. “The problem is going to be convincing many on Capitol Hill that these living wills are worth the paper they’re printed on.”

Dodd-Frank called for limited portions of the living wills to be released to the public. The FDIC and Fed are preparing to release those sections on their websites. The rest of the documents will remain private.

Falling Short

The first effort last year fell short of what the law demands, according to Jim Wigand, the former FDIC official who was responsible for planning for big-bank failures during the 2012 process. Wigand said earlier this year all the banks -- a list that also includes Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG -- had more progress to make before their plans would be credible.

The first round of plans was given a pass by regulators, who said they wouldn’t formally find any of them flawed. This year, lenders face a higher bar. They’ll need to fix the past faults, and in April the regulators outlined demands for more details on strategies for resolving international transactions, dissolving trading connections and maintaining liquidity.

The banks also must submit plans that account for a troubled marketplace where buyers for assets and operations may not be readily available.

Seiberg said he doubts the federal agencies will use their power to force asset sales and restructurings.

“If the regulators really wanted to break up the mega- banks, they would have done it already,” he said.

Last Resort

The FDIC was also granted power by Dodd-Frank to take a firm over and wind it down if failure would still pose too great a threat to be handled by bankruptcy. FDIC Chairman Martin Gruenberg described it to lawmakers as a last resort “if resolution under the bankruptcy code would result in serious adverse effects on financial stability in the United States.”

Senator Michael Crapo of Idaho, the senior Republican on the Banking Committee, told Gruenberg in a July hearing that he appreciated all the work on living wills, “but many, including myself, believe that Dodd-Frank did not end too-big-to-fail.”

These 11 banks, those with more than $250 billion in U.S. non-bank assets, are the largest tier of lenders required to file the wills. The next group of smaller firms, including Wells Fargo & Co., filed their first plans in July. Another cohort with $50 billion to $100 billion in non-bank assets will file by the end of the year.

Non-bank financial firms designated systemically risky by the Dodd-Frank-created Financial Stability Oversight Council, such as American International Group Inc. and Prudential Financial Inc., will also have to file plans.

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