Giant US banks ‘still too big to fail’
Five of the big eight US banks have failed to come up with a solid plan to explain how they could be safely wound down or broken into chunks in the event that they collapse in a future financial crisis or recession.
The so-called "living wills" are a crucial part of the plan to make sure a bank’s collapse does not wreck the financial system and the wider economy.
If living wills are put in place before any future calamity, regulators hope the banks will no longer be too big to fail and so a collapse would not result in either the devastation which followed the Lehman Brothers collapse, or another taxpayer bailout.
But regulators at the Federal Reserve said Bank of America, BNY Mellon, JP Morgan, State Street, and Wells Fargo have all come up with plans which are “not credible or would not facilitate an orderly resolution” in the event of bankruptcy.
Those five have been ordered to submit better plans by October 1.
The Fed said Goldman Sachs and Morgan Stanley’s plans have “weaknesses” but the problems are not as serious, while Citigroup’s submission merely has “shortcomings” and should still be able to resolve the bank effectively.
Even the banks deemed to have failed were said to have taken “important steps,” but problems remain with their plans.
JP Morgan was told it had not created thorough plans for the liquidity it would need in a resolution process, nor had it explained how to run down its derivatives and trading portfolios.
Bank of America also lacked proper liquidity plans, the Fed said, and does not have strong governance proposals in place to ensure the necessary actions are taken promptly in any resolution process.
Meanwhile State Street was told it has not fully explained how critical functions would continue to operate when they share crucial infrastructure with other parts of the business.