By Ryan Tracy And Victoria McGrane
Twelve of the largest U.S. banks are trying yet again to
persuade regulators they can safely navigate bankruptcy without
tanking the broader financial system.
Summaries of "living wills" from firms including J.P. Morgan
Chase & Co. and Goldman Sachs Group, Inc. were published Monday
on the websites of the Federal Reserve and the Federal Deposit
Insurance Corp. The stakes are high: If the plans don't please
regulators, firms could be forced to break up or shrink.
Among the new details: Banks have rethought how they would run a
bankruptcy process, emerging significantly smaller than their
current size or, in the case of Goldman Sachs and Morgan Stanley,
ceasing to exist after selling themselves off in pieces.
Bankers and lawyers who worked on the plans said this year's
versions--the fourth time most of the firms have filed--should
address regulators' concerns. The wills were mandated by the
Dodd-Frank regulatory overhaul to ensure that any failure wouldn't
set off the kind of catastrophe that accompanied the collapse of
Lehman Bros. in 2008.
Last year, the Fed and FDIC found most plans flawed. They
ordered the firms to start fixing the problems or face sanctions
such as higher capital requirements or forced divestitures.
"The firms have taken meaningful, concrete steps to ensure their
plans are credible and that no firm is too big to fail," said Rob
Nichols, president of the Financial Services Forum, a trade group
that represents big banks.
Firms whose bankruptcy playbooks were published Monday include
Bank of America Corp., Bank of New York Mellon Corp., Citigroup
Inc., Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street
Corp., Wells Fargo & Co., and the U.S. units of Barclays PLC,
UBS AG, Credit Suisse Group AG, and Deutsche Bank AG. Last year,
regulators said only Wells Fargo's plan was realistic.
The Fed and FDIC said on Monday they would begin reviewing the
new plans. The agencies hope to provide feedback by the end of this
year, according to people familiar with the matter. Last August
they criticized banks for assuming they could sell business units
and find sources of capital to remain afloat.
Almost all big U.S. banks said they would adopt a so-called
"single point of entry" bankruptcy strategy, a change from many
previous plans. Under the scenario, a bank's parent company and
perhaps a few subsidiaries would enter bankruptcy, while the firm's
units would be recapitalized with resources from the parent and
remain open while they were sold, wound down or reorganized.
J.P. Morgan, for instance, said that under bankruptcy it would
expect its national bank unit to shrink by one-third of its current
size and its broker-dealer to shrink by two-thirds. The bank also
said it continues to merge and eliminate legal entities.
Bank of America said in a worst-case scenario it would wind down
and sell its global markets business, which focuses on sales and
trading, and shrink its global banking business, which caters to
corporate customers. The smaller Bank of America would focus on
consumer banking and wealth management.
The bank also said it was already taking steps to make its units
less interconnected, including separating its broker-dealer
activities into two legal entities, one focused on retail customers
and one focused on wholesale customers, such as pension and hedge
funds.
Citigroup said under a wind down it expected its market
businesses, operating through the broker-dealer entities, would be
discontinued. The global corporate banking operations could be
sold, and the U.S. retail banking operations could be spun off as
their own public company. Information-technology employees would be
stationed in branches or less-risky units.
Working together, the banks have completed one major item from
the must-do list the Fed and FDIC issued last August, which many
firms touted in their new plans: Eighteen global banks agreed to
change derivatives contracts in a manner designed to prevent
counterparties from terminating the contracts en masse once a bank
goes into crisis, as occurred when Lehman Brothers failed in
2008.
Under orders by regulators to put more detail in the public
sections of the living wills, the banks submitted longer documents
this year. Citigroup's plan this year measured 102 pages, while
last year's was 31 pages.
Private versions of the documents, by contrast, are usually
thousands of pages long, leading regulatory staff to use
word-search functions in their computer software as they comb the
digital files.
Justin Baer, Christina Rexrode and Emily Glazer contributed to
this article
Write to Ryan Tracy at ryan.tracy@wsj.com and Victoria McGrane
at victoria.mcgrane@wsj.com
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