STT State Street Corporation

By Donna Borak and Emily Glazer 

Five of the country's biggest banks detailed tweaks to their business models in hopes of persuading regulators they could absorb significant financial distress without requiring taxpayer funds to stay afloat.

The stakes are high for J.P. Morgan Chase & Co., Bank of America Corp., and three others. If regulators deem these revisions of their so-called living wills -- made public by the government Tuesday -- to be insufficiently credible, those institutions could be ordered to hold higher levels of capital on their books, or to restructure and shed business lines.

Regulators are facing considerable pressure from politicians to use this process to break up the biggest banks, with many -- notably Massachusetts Democratic Sen. Elizabeth Warren -- arguing these institutions remain "too big to fail."

Federal regulators had declared in April that earlier plans submitted by those two banks -- along with Wells Fargo & Co., Bank of New York Mellon Corp., and State Street Corp.--didn't show sufficiently how they could wind down their operations in an orderly fashion, and told them to address weaknesses by Oct. 1.

In the latest public versions of the plans -- each running around 50 pages -- the firms laid out modest changes to their business operations to address what regulators had branded "deficiencies" in their original documents, such as giving more detailed explanations for how they would unload assets, or putting top managers in charge of bankruptcy planning. The firms also submitted considerably longer living wills that won't be made public.

The agencies in charge of the process -- the Federal Reserve and the Federal Deposit Insurance Corp.--said in a press release they hadn't yet reviewed the plans and "will now be initiating their process for review." The agencies didn't say how long the process would take.

The living wills requirement was created by the 2010 Dodd-Frank financial overhaul law, enacted in the wake of the financial crisis to, among other things, prevent a recurrence of government bank bailouts.

This is the third round for the major banks. In 2012, they submitted plans but didn't get any individual feedback. In 2014, the Fed and FDIC rejected all the plans. This year, they kicked back five, seeking revisions, and cleared three -- from Goldman Sachs Group. Inc., Morgan Stanley and Citigroup Inc.--though the regulators still said those plans had "weaknesses" and "shortcomings." Those three firms submitted updated plans that were also made public Tuesday.

J.P. Morgan said it had altered its business organization to create a new "intermediate holding company" and has moved assets into the unit, which would be ready to inject immediately capital and liquidity into distressed subsidiaries. Bank of America said it had moved assets into a pre-existing intermediate company for this purpose.

These moves are aimed at meeting regulator questions about the banks' abilities to estimate liquidity resources and needs in times of stress, and the lack of a formal agreement to assure support for those subsidiaries.

J.P. Morgan also said it had identified 16 "objects of sale" along with potential buyers who could pick up the properties quickly.

Wells Fargo said it, too, had crafted a more detailed playbook for potential "strategic sale transactions." And the bank said it is giving more responsibility for living will planning to top executives. Wells Fargo President Timothy J. Sloan now oversees all recovery and resolution planning initiatives. Chief Financial Officer John Shrewsberry now leads the formal management governance committee related to living wills, and that committee now includes senior executives from "key support groups" including the bank's controller, head of corporate enterprise risk and the chief technology officer.

If regulators don't consider those moves sufficient, they now have the power to raise capital requirements or even force divestitures, as they see fit. Both agencies -- the Fed and FDIC -- would have to agree on whether the proposed fixes by the firms are adequate, and if not, what the appropriate action would be to take.

There is no set time frame on when they must reach a decision.

"It's all about starting the clock to give the agencies the authority to use some powerful tools if banks are unable to remediate those deficiencies," said John Simonson, a principle at consulting firm PwC and a former FDIC official.

John Carney contributed to this article.

Write to Donna Borak at donna.borak@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

October 04, 2016 19:40 ET (23:40 GMT)

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