5 Big Banks’ Living Wills Are Rejected by U.S. Regulators

JPMorgan Chase & Co., Bank of America Corp. and three other major U.S. banks failed to persuade regulators they could go bankrupt without disrupting the broader financial system and could now face a tighter leash from Washington after government agencies used one of the most significant post-crisis powers bestowed under the Dodd-Frank Act.

The banks — also including Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp. — must scrap their resolution plans, or living wills, after the Federal Reserve and the Federal Deposit Insurance Corp. said versions submitted last year failed to satisfy their requirements. The lenders will have until Oct. 1 to rewrite the plans — but under the pressure that another failure would give regulators power to subject them to more capital or liquidity constraints on their businesses.

“The FDIC and Federal Reserve 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,” FDIC Chairman Martin Gruenberg said in a statement Wednesday.

Investors shrugged off the news as shares of all the banks whose living wills were rejected rose and the KBW Bank Index increased 2.27 percent to $65.36 at 10:02 a.m. in New York. JPMorgan posted first-quarter profit earlier Wednesday that beat Wall Street estimates as the company slashed bankers’ pay and trading revenue declined less than most analysts predicted.

Overhaul Strategies

While the rejected banks face the arduous process to overhaul strategies that in some cases run into thousands of pages, Citigroup Inc. can breathe a sigh of relief, having won provisional approval from both regulators. Goldman Sachs Group Inc. and Morgan Stanley also escaped having their plans termed “not credible,” but only because they didn’t get failing grades from both agencies. Goldman Sachs’s plan was faulted by the FDIC and Morgan Stanley’s by the Fed.

The living-wills exercise was a key check on the biggest banks written into Dodd-Frank, the regulatory overhaul prompted by the 2008 financial crisis. The fall of Lehman Brothers Holdings Inc. in September 2008 demonstrated what could happen when huge, complex financial firms land in bankruptcy court, so the resolution plan process was designed to ensure big banks in the U.S. can be wound down quickly without taking others with them.

Almost two years ago, 11 of the largest banks were told their plans fell far short of what regulators deemed acceptable, though the agencies didn’t formally reject them. Since then, the industry has rehashed how derivatives contracts are written, and the agencies have imposed tough capital and liquidity demands on each lender. Even so, bankers were anxious to hear whether their efforts had gone far enough.

Worst-case Scenario

The worst-case scenario for a bank that continually fails to present credible plans is that regulators eventually could get authority to break them up, according to the law. Those are uncharted waters, because this marks the first time regulators have taken the initial step to find fault.

“We’re going to do everything possible to fix this issue,” JPMorgan Chairman and Chief Executive Officer Jamie Dimon said Wednesday in a conference call after the bank reported first-quarter results.  Marianne Lake, JPMorgan’s chief financial officer, added that the bank is disappointed, but it should only face a modest expense to fix the plan.

Each bank received a letter detailing regulators’ expectations. JPMorgan was credited with having made some improvements since its last submission but was told that it lacked “appropriate models and processes for estimating and maintaining liquidity” during a resolution period. The bank was also told that its internal structure fails to promote an easy resolution.