STT State Street Corporation

By Ryan Tracy 

WASHINGTON -- U.S. regulators are preparing to notify some of the largest U.S. banks, including J.P. Morgan Chase & Co., that they have submitted flawed plans detailing how they would handle a potential bankruptcy, according to people familiar with the matter.

The move, which could come as soon as this week, would raise the prospect of higher capital requirements or other regulatory sanctions for some of the institutions, and call into question whether the firms remain "too big to fail" without a taxpayer bailout.

At least half of the eight American banks labeled "systemically important" by global regulators are expected to receive a harsh verdict on their "living wills" that they were required to submit under rules crafted since the financial crisis aimed at preventing another bank bailout, these people said.

The long-awaited verdict by the Federal Reserve and Federal Deposit Insurance Corp. is not yet final and could change, but regulators are putting the finishing touches on their feedback to the firms and will make their findings public soon, these people said.

The Fed's governing board was set to hold a closed meeting Tuesday afternoon to discuss the matter, one of the people said.

Representatives for the Fed, FDIC and J.P. Morgan declined to comment.

J.P. Morgan has previously said its living will is credible and that it has a "fortress balance sheet" that would prevent it from ever needing to tap taxpayers for help in a crisis. "We will be vigilant and will never take such a high degree of risk that it jeopardizes the health of our company....this is a bedrock principle," Chief Executive James Dimon said in his recent shareholder letter.

The adverse findings would mean J.P. Morgan and other firms will have to rewrite their bankruptcy strategies to address issues regulators have identified, or face sanctions, such as being required to hold higher levels of capital, which restricts borrowing and protects against losses -- but can also eat into profitability. If they fail to submit credible strategies repeatedly over a period of years, regulators could force them to divest certain assets.

In addition to J.P. Morgan, regulators have significant concerns about the bankruptcy strategies of the two so-called trust banks in the group: Bank of New York Mellon Corp. and State Street Corp., according to people familiar with the matter. Regulators have also been considering whether Bank of America Corp. should receive an adverse verdict, these people said.

Representatives for Bank of New York, State Street and Bank of America had no immediate comment.

Citigroup Inc. was expected to receive a positive finding from regulators, these people said.

A Citigroup spokesman had no comment.

Details about the other three American banks covered by the process -- Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. -- couldn't be confirmed.

The expected verdicts do not mean the regulators believe the banks face any imminent danger of going out of business. Rather, the whole exercise was designed to start with the premise that each might one day face such extreme distress and show how they would respond. The bankruptcy strategies also don't take into account the fact that regulators could use other methods to avoid bailouts, including using the FDIC's authority to take over and liquidate a failing firm.

Regardless of what regulators say when they release their findings, however, the decisions are likely to feed big-bank critics across the political spectrum who say the government needs to take drastic action to reduce the size and influence of large Wall Street banks.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

April 12, 2016 16:42 ET (20:42 GMT)

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