U.S. Regulators Criticize Four Major Banks’ Living Wills; FDIC Raises Concerns About Citigroup: U.S. bank regulators directed Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase on Friday to enhance their plans for orderly bankruptcy resolution, while the FDIC raised additional concerns about Citigroup’s strategy.
WASHINGTON : The FDIC expressed more worries about Citigroup’s proposal, and on Friday, U.S. bank regulators ordered Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase to improve their plans for an orderly bankruptcy settlement.
When these banks submit updated plans to regulators in 2025, the Federal Reserve and the Federal Deposit Insurance Corporation stipulated that these banks must enhance their “living wills” to show how they may safely unwind their derivatives assets.
The notional amount of the derivatives held by large banks is in the trillions of dollars, and any adjustments to how these portfolios’ risk, liquidity, or contingent liabilities are managed might have a very high cost.
By September, the banks must provide a description of how they plan to resolve these previously undetected deficiencies. Bank of America refrained from commenting right away. Goldman Sachs and JPMorgan declined to comment.
“The Federal Reserve is pressuring the banks to appropriately adjust their living wills,” stated Christopher Marinac, Janney Montgomery Scott’s director of research. “This indicates that the Fed is currently dissatisfied with the outcome, and more work remains to be done.
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What’s happening with Citi?
By designating Citigroup’s strategy as a “deficiency,” the FDIC has expressed serious concerns about it and made it clear that it does not believe it to be credible. The Fed disagreed, though. Had both authorities found deficiencies in Citi’s strategy, the bank would have needed to submit a revised version and might have been subject to more regulatory oversight. The insufficiency would be issued by the FDIC, according to earlier reports from Reuters.
According to TD Cowen analyst Jaret Seiberg, Citi needs to improve due to the authorities’ divergent evaluations, but forced divestitures are not likely.
Large banks were required to periodically submit resolution plans to regulators, outlining how they may be safely unwound without government help, in the wake of the financial crisis of 2007–2009. The viability and trustworthiness of these plans are assessed.
Regulators have criticized almost all of the major banks for their living wills and mandated that they improve them. In 2016, for example, regulators identified flaws in the plans of Morgan Stanley and Goldman Sachs as well as problems in those of Bank of America, BNY, JP Morgan Chase, State Street, and Wells Fargo.
Banks usually submit updated documentation in response to these issues.
Regulators pointed out in a letter to Citi that the company’s data and control flaws caused erroneous estimates of the capital and liquidity required to unwind derivatives contracts. Its 2021 lifestyle will also mentioned these problems. When Citi files its 2025 plan, regulators want “independent confirmation” that these problems are resolved, controls are in place, and the data are accurate. Also, Citi needs to describe its resolution strategies for its international operations.
Citi has been addressing regulatory concerns regarding its data management for a number of years. According to Reuters in February, the bank was given more regulatory orders to address issues by the end of 2023.
“We are fully committed to addressing the issues identified by our regulators,” said Citi. “Although we have come a long way in our transition, we still recognize that there is still more work to be done in several areas, such as enhancing data quality and regulatory procedures. We continue to believe that Citi may be settled without causing harm to the system or without government funding.
During afternoon trading, the stocks of JPMorgan, Bank of America, Goldman Sachs, and Citigroup all experienced a 1% decline.
As a reflection of the difficulties authorities encountered during the Credit Suisse crisis last year, banks will also need to address contingency planning and securing the necessary measures from foreign governments to carry out their plans in their next filings. The question of whether resolution plans work is raised by the fact that UBS took over Credit Suisse, rather than the company carrying out its own living will.
Regulators failed to find issues with any of the plans that Morgan Stanley, State Street, Bank of New York Mellon, and Wells Fargo & Co. filed.
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