WASHINGTON – Regulators struck down the living wills of five of the eight megabanks under evaluation, including JPMorgan Chase, Bank of America and Wells Fargo, requiring them to submit fixes to their resolution plans by Oct. 1 or face more stringent regulatory requirements.
The Federal Deposit Insurance Corp. and Federal Reserve Board announced Wednesday that five banks' resolution plans were jointly determined as "non-credible": BofA, Bank of New York Mellon, JPMorgan, State Street and Wells. Those firms have a little more than five months to fix deficiencies outlined by regulators, ranging from liquidity concerns to problems related to shared services between the company's separate entities and governance mechanisms that could trigger the failure of a bank.
The FDIC found that Goldman Sachs submitted a "non-credible" plan, while the Fed ruled that Morgan Stanley's plan was deficient, but because the two agencies did not concur on those two banks, they are not subject to the enforcement action of most of their peers.
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Regulators have yet to provide feedback on last year's living-will resolution plans, but for foreign banks with significant operations in the U.S., those assessments are too late. Such institutions are required to put in place an entirely different business model by July of this year.
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While little is known about what regulators are weighing as they grade the 12 biggest firms' resolution plans, experts deeply familiar with the process are speculating that liquidity could be a determining factor in whether the plans are deemed credible or sent back to the drawing board.
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One key test of banks' latest living will submissions, the first batch of which are due Wednesday, is whether the public portions of their plan are understandable to the public. If they aren't, regulators are ready to take tough action against institutions.
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Only Citigroup received a passing grade from regulators. The agencies found flaws with Citi's plan, but "they did not believe the shortcomings rose to the level of the statutory standard required for a joint determination of non-credibility," FDIC Chairman Martin Gruenberg said in a statement.
"The actions the FDIC and the Federal Reserve are announcing today are a significant step forward in the use of the living will authority to require systemically important financial institutions to demonstrate they can fail in an orderly way under bankruptcy at no cost to taxpayers," Gruenberg said.
This is the first year since the exercise began in 2012 that the FDIC and the Fed have come together on joint determinations of non-credibility. Two years ago, the FDIC was prepared to find several big banks' plans as "non-credible," but the Fed disagreed. The determinations now give the agencies additional powers to impose higher capital requirements and, if problems are not fixed, asset divestures.
Speaking with reporters on a conference call, a senior agency official stressed that living wills are evolving documents that banks are must update as their business changes.
The agencies cut banks a little slack, saying that while all eight institutions had to correct deficiencies in their 2015 living wills by October, they did not need to submit new annual plans by July of this year. The banks' next full submissions are due in July 2017.
The agencies are still evaluating the plans of several large foreign-based banks. The senior agency official said, however, that those grades won't likely be released until after the banks implement a requirement to form an intermediate bank holding company in July. Regulators will examine the banks' 2015 plans, but will take into account the structural changes of the banks since their determinations.
Some regulators emphasized that the eight U.S. banks had fallen significantly short in accomplishing what regulators wanted, suggesting the exercise shows that ending "too big to fail" is a long way off.
"Each plan has shortcomings or deficiencies, although as the letters emphasize, some firms have made more progress than others," FDIC Vice Chairman Thomas Hoenig said in a statement. "Most importantly, no firm yet shows itself capable of being resolved in an orderly fashion through bankruptcy. Thus, the goal to end ‘too big to fail' and protect the American taxpayer by ending bailouts remains just that: only a goal."
But the grades are a clear sign that regulators are planning to toughen up their supervisory approach to the biggest banks.
"The rejection of living wills is the latest confirmation that U.S. regulators are not easing up on the largest banks," Capital Alpha Partners said in a statement. "The living wills exercise leaves bank stocks with a lot of potential for unpleasant surprises."
Still, though regulators eventually gain the power to break up the banks if they do not submit a satisfactory living will, such a move is a long way off, analysts said.
"There is a long and torturous path between failing the living will and having the Federal Reserve and FDIC demand structural changes at the banking company," said Jaret Seiberg in a statement from Guggenheim Securities. "Divestitures would be years away even if that is what regulators are seeking."
Both agencies were under intense scrutiny to come together on at least a handful of determinations this year for both internal and external reasons, experts said.
"The agencies have to demonstrate that they are using their authority under Dodd-Frank and progress is being made," said James Wigand, a partner at Millstein & Co. who served as the Federal Deposit Insurance Corp.'s first director of the Office of Complex Financial Institutions. "The most transparent way to do that is for the agencies to disclose that some plans were not credible and the timeframes institutions have to address the plans' deficiencies."
"Otherwise," Wigand told American Banker before the determinations were announced, "the findings and supervisory actions, which both agencies agreed upon, may not appear to be advancing the process."
