By Ryan Tracy
WASHINGTON -- Regulators ordered five big U.S. banks to make
significant revisions to their so-called living wills by Oct. 1 or
face potential regulatory sanctions, a stern warning that will fuel
criticism the firms are "too big to fail."
J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of
America Corp., Bank of New York Mellon Corp., and State Street
Corp. were found by the Federal Reserve and the Federal Deposit
Insurance Corp. to have plans for a possible bankruptcy that don't
meet the legal standard laid out in the 2010 Dodd-Frank law, which
requires that firms have credible plans to go through bankruptcy at
no cost to taxpayers.
They said those firms had until October to present plans
regulators find acceptable, or the agencies or regulators could
impose higher capital requirements, restrictions on growth or
activities, or other sanctions.
Bank stocks, however, rallied in recent trading, led by J.P.
Morgan, which reported smaller-than-expected declines in earnings
and revenue for the first quarter despite difficult trading
conditions.
The regulators split in their assessments of Goldman Sachs Group
Inc. and Morgan Stanley. The FDIC said that Goldman Sachs's plan
didn't meet the legal standard, while the Fed didn't give that
negative assessment.
The two regulators took the opposite stance on Morgan Stanley.
The Fed "identified a deficiency" in Morgan Stanley's plan that it
said didn't meet the legal standard, but the FDIC didn't go that
far, the agencies said in a news release.
Citigroup Inc. was the only firm whose plan wasn't rejected by
either agency, though the Fed and FDIC said the firm's plan had
"shortcomings that the firm must address" by July 2017.
The living wills had been submitted by the eight U.S. banks that
had been deemed "systemically important financial institutions," or
SIFIs, that are seen as being so large that their distress could
put the economy at risk.
The agencies "are committed to carrying out the statutory
mandate that systemically important financial institutions
demonstrate a clear path to an orderly failure under bankruptcy at
no cost to taxpayers," said FDIC Chairman Martin Gruenberg in a
statement Wednesday. "Today's action is a significant step toward
achieving that goal."
Overall, the regulators were less harsh in their assessments on
the Wall Street-focused firms than on the universal and commercial
banks.
While officials say they are imposing a much-needed new caution
on a financial system that collapsed eight years ago, critics say
that the tight leash they have attached to the largest banks may be
undermining the sector's recovery, imposing new rules that
discourage lending, crimp market liquidity, and erode bank
profitability.
John Dearie, acting chief executive of the Financial Services
Form, a trade group representing all of the large banks' CEOs
except Wells Fargo, issued a statement Wednesday describing the
regulators' concerns as "technical shortcomings" that the industry
is committed to address.
"No financial company should be considered too big to fail," he
said.
J.P. Morgan said on a call with reporters Wednesday the bank was
disappointed in the results but will work with regulators to
understand feedback in more detail. "If other firms can satisfy
[regulators on living wills] then I'd be surprised if we can't,"
Chief Executive James Dimon said.
Wells Fargo, which had previously received more positive
feedback than other firms, was found to have made "material
errors...that undermine confidence" in its preparedness for
bankruptcy.
Wells Fargo said in the statement the firm was disappointed in
the results and will address regulators' concerns. Regulators
"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," the
statement said.
Among the other banks graded, the regulators said that Bank of
America needs to improve its computer models and processes
estimating liquidity needs and clarify its "triggers" declaring
bankruptcy.
Bank of New York had insufficient analysis to support its
bankruptcy strategy and hasn't made enough progress simplifying its
structure of legal entities, regulators said.
State Street was also faulted for problems its structure and
"questionable assumptions regarding capital levels needed to
execute the resolution strategy," regulators said.
Goldman, Morgan Stanley, and Citigroup won't need to show they
have addressed the regulators' concerns until July 2017, when all
eight firms will file fully revised plans.
The regulators said Goldman and Morgan Stanley fell short on
processes for determining how much liquidity their various units
would need to sustain themselves once their parent filed for
bankruptcy protection and didn't offer enough details on plans to
wind down the derivatives contracts.
While Citigroup's plan fared best among the eight, regulators
said that, among other things, it does need to develop a more
detailed playbook outlining how it would go through various stages
of the bankruptcy process, regulators said.
Big bank critics applauded the regulators' verdict, but also
said further crackdowns on the firms would be required to avoid
future bailouts.
FDIC Vice Chairman Thomas Hoenig, who has been much more
critical of the banks than FDIC Chairman Gruenberg, issued his own
statement saying that even if the firms have credible living wills,
the plans still don't show the firms are strong enough to weather a
major crisis on their own, including a crisis where multiple huge
banks fail.
"The goal to end too big to fail and protect the American
taxpayer by ending bailouts remains just that: only a goal," Mr.
Hoenig said in a statement Wednesday.
--Justin Baer, Emily Glazer, Christina Rexrode, and Rachel
Louise Ensign contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
(END) Dow Jones Newswires
April 13, 2016 10:02 ET (14:02 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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