Cheat Sheet: Why JPM, B of A, Wells Flunked Their Living Wills (and Citi Didn’t)

WASHINGTON – In declaring that five U.S. banks' resolution plans were "noncredible," regulators provided new details on exactly what each institution did wrong.

Following is a guide to the issues cited by regulators and the banks' reaction to the findings.

JPMorgan Chase

What regulators criticized:

• Liquidity risk, including the potential for ring-fencing, because the bank's plan relies on funds held by foreign entities
  
• Insufficient model to estimate the company's liquidity needs
  
• Plans to align legal and business lines through divestiture were not "sufficiently actionable"
  
• No analysis of how JPMChase would phase out trading portfolios if counterparties cease trading with the bank
  
• Inadequate governance mechanisms for the implementation of the resolution plan

What regulators said improved:

• Reduction of cross-border sweep arrangements and reliance on short-term funding
  
• Compliance with clean holding company guidance, which aims to cut down on financial arrangements within the holding company that could complicate the resolution process
  
• Tracking of securities collateral, mapping of dependencies and other improvements in documenting the firm's internal systems and processes
  
• Adherence to the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol

How the bank responded:
In its earnings call on Wednesday morning, Jamie Dimon, the bank's chairman and chief executive, said "we're going to do everything possible to fix this issue."

Noting that the bank was cited for its liquidity processes, Dimon said: "We have tons of liquidity. If other firms can satisfy that, I'd be surprised if we can't."

Marianne Lake, JPMorgan's chief financial officer, said that the bank was "disappointed" by the finding but determined to make the required fixes in a timely fashion.

"Based on the preliminary read, there's going to be significant work to meet the expectations," she said.

Bank of America

What regulators criticized:

• Uncertainty with regard to the bank's liquidity profile. Regulators said the bank's liquidity model did not demonstrate that the institution appropriately estimates and maintains sufficient liquidity
  
• Governance processes did not include triggers to allocate capital and liquidity to material entities in the event of a bankruptcy
  
• Insufficient details on the wind-down of derivative portfolios, including information on the interconnections between banking entities and broker dealers
  
• Insufficient analysis of the state and federal law challenges B of A would face in bankruptcy
  
• The bank's criteria to identify legal entities in order to simplify its structure "lack specificity"

What regulators said improved:

• Better funding structure, including through increase of high-quality liquid assets
  
• Compliance with clean holding company requirements, which aims to cut down on financial arrangements within the holding company that could complicate the resolution process
  
• Governance processes for the implementation of a resolution plan
  
• Alignment of shared services along legal entity lines
  
• Simplification of the company's structure, with moves like the merger of BAC and Merrill Lynch & Co.
  
• Simplification of the bank's derivatives booking model

How the bank responded:
"As the regulators indicated today, we have made progress over the past several years by taking important steps to enhance our resolvability and facilitate an orderly resolution in bankruptcy, but we have more work to do. We will expeditiously address the shortcomings and deficiencies identified, and develop a credible plan that allows for an orderly resolution without taxpayer support. Today's announcement does not affect our ability to serve our customers and clients and return capital to our shareholders."

Wells Fargo

What regulators criticized:

• The plan contained "material errors," including in the projections of available liquid assets if the bank were to be placed under FDIC receivership. Regulators demand "a robust process to ensure quality control and accuracy" in the next living will
  
• Insufficient handling of shared-services issue
  
• The company's legal entity criteria were not specific enough to ensure the firm's structure was simplified appropriately for a resolution plan

What regulators said improved:

• Increased high-quality assets
  
• Compliance with clean holding company requirements
  
• Better tracking of financial contracts
  
• Reduction in the number of legal entities since acquisition of Wachovia Corp.
  
• Adherence to ISDA Protocol

How the bank responded:
"We were disappointed to learn that our 2015 resolution plan submission was determined to have deficiencies in certain areas. 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. We understand the importance of these findings and we will address them as we update our plan by the October 1, 2016 deadline identified by the agencies. We remain dedicated to sound resolution planning and preparedness."

State Street

What regulators criticized:

• Shared-services plan to ensure critical operations during bankruptcy is not "actionable"
  
• Insufficient alignment of legal and business entities
  
• The regulators were not convinced by the company's modeling of the capital levels needed for undergoing bankruptcy
  
• The liquidity plan was not sufficient, or detailed enough
  
• The governance playbook describing how the board members would implement the resolution strategy was "not fully developed"

What regulators said improved:
Increase in high-quality liquid assets

• Compliance with clean holding company requirements
  
• Governance mechanisms including a playbook that addresses how board of directors would implement resolution strategy
  
• Playbook that addresses a plan to wind down securities
  
• Reduction in the number of legal entities
  
• Adherence to ISDA Protocol

How the bank responded:
"While the Federal Reserve and FDIC noted improvements in our 2015 resolution plan over our prior resolution plans, the regulatory authorities jointly determined that our 2015 resolution plan is not credible or would not facilitate an orderly resolution. We are required to address the deficiencies jointly identified by the Federal Reserve and the FDIC by October 1, 2016."

Bank of New York Mellon

What regulators criticized:

• Insufficient handling of shared-services issue
  
• Regulators not convinced by the bank's bankruptcy plan, which assumed that BNY Mellon Trust and the Bank of New York Mellon would fail simultaneously
  
• Failure to fully implement legal entity criteria to simplify the bank's structure
  
• The firm's liquidity plan was also called into question, though regulators blacked out much of the details of their concerns in the public release of their letter to the bank

What regulators said improved:

• Funding structure, including increase in high-quality liquid assets, ring-fencing measures and monitoring of intraday liquidity
  
• Compliance with clean holding company requirements
  
• Governance mechanisms include a playbook that addresses how board of directors would implement resolution strategy
  
• Simplification of structure with moves including the move of BNYM International Operations India to the main bank
  
• Adherence to ISDA Protocol

How the bank responded:
"BNY Mellon acknowledges the regulators' feedback and is committed to addressing the issues raised within the required timeframe. As noted in the regulators' letter, BNY Mellon has taken important steps to enhance the firm's resolvability and facilitate its orderly resolution in bankruptcy. We remain fully focused on meeting the regulatory expectations to strengthen our plan as part of this iterative process."

Citigroup

Citigroup was the only bank to pass both the FDIC and Fed's assessments of the living wills. Still, regulators flagged several areas its plan could be improved.

What regulators criticized:

• Governance mechanisms insufficient to fund subsidiaries and for escalating information to senior management in the event of a bankruptcy
  
• Insufficient analysis of state and bankruptcy law challenges
  
• Overoptimistic modeling of the wind-down of trading portfolios
  
• Liquidity plan lacking specificity in addressing minimum cash flow requirements

What regulators said improved:

• Funding structure, including increase of high-quality liquid assets, better capital and liquidity policies and better operational management of liquidity
  
• Compliance with clean holding company requirements
  
• Development of specific legal entity criteria to simplify the company's structure
  
• Reduction in asset sizes and number of business and legal entities
  
• A better shared-services plan – which would allow different entities to maintain operations independently if the holding company were to shut down.

How the bank responded:
Michael Corbat, Citi's CEO, said in a statement: "We are pleased that neither the Fed nor the FDIC found any deficiencies in our 2015 Resolution Plan. The preparation of the plan entailed a rigorous, firm-wide process across Citi's businesses, functions and regions. We will address the feedback we received from the Fed and FDIC and are committed to continuing to strengthen Citi's resolution planning capabilities. "Citi has become a simpler, smaller, safer and stronger institution since the financial crisis and it is critical that Citi can be resolved without the use of taxpayer funds and without adverse systemic impact," Corbat added.

Goldman Sachs

Goldman was cited as deficient by the FDIC, but not the Fed. Only a joint determination by both regulators starts a regulatory countdown to make appropriate fixes, but the regulators are asking the bank to make several fixes before Oct. 1.

What the FDIC criticized:

• Estimation of the liquidity requirements of the bank's entities was not detailed enough
  
• Plan to address the wind-down of trading activities lacked specificity, including interconnections between the banking entities and broker-dealers how it would reduce over-the-counter derivatives
  
• Governance triggers that would ensure timely access to funds among the different entities in the during a bankruptcy
  
• Limited analysis of the bank's legal challenges in the event of a bankruptcy
  
• Short duration of the runway period – the amount of time the firm has between recognizing the inevitability of failure and filing for bankruptcy

What the agencies said improved:

• Funding structure, including the loss-absorbing capacity through the increase of high-quality liquid assets
  
• The types of financial arrangements with the holding company that could complicate the resolution process were cut down satisfactorily
  
• Shared services were made more independent
  
• Alignment of its legal and business lines and reduction of the number of entities
  
• Simplification of the firm's booking model to reduce risk during internal transfers
  
• Adherence to the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol

How the bank responded: The bank has not yet posted a response.
Morgan Stanley

Morgan was cited by the Fed, but not the FDIC. Like Goldman Sachs, however, it must still make fixes before Oct. 1.

What the Fed criticized:

• The bank's liquidity modeling had several shortcomings, including underestimation of the potential for ring-fencing
  
• The plan for a wind-down of trading activities was not detailed enough, in terms of costs and risks
  
• The governance mechanisms lacked certain specific bankruptcy triggers
  
• Insufficient analysis of the state and bankruptcy law challenges Morgan Stanley would face in bankruptcy

What the agencies said improved:

• Funding structure, including increase in high-quality liquid assets
  
• Compliance with clean holding company requirements
  
• Governance mechanisms for transfer of assets and information escalation in the event of a failure
  
• Shared-services model includes separate service entities
  
• Simplification of the firm's structure, including the reduction of the number of legal entities and operation of the wealth management and investment management businesses from the broker-dealer business
  
• Adherence to ISDA Protocol and decrease in financial interconnectedness

How the bank responded: The bank has not yet posted a response.
Kristin Broughton and Alan Kline contributed to this article.