Risk & Compliance

Five Top Banks Fail Tests of Bankruptcy Plans

The firms now have until Oct. 1 to show they can survive a financial collapse without a taxpayer bailout.
Katie Kuehner-HebertApril 13, 2016

Five of the country’s top eight financial services firms have failed the government’s “too big to fail” test to determine whether they could survive a financial collapse without a taxpayer bailout.

The banks are required to have a so-called living will under the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis.

But Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo all have bankruptcy plans that are “not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code,” the Federal Deposit Insurance Corp. and the Federal Reserve Board jointly announced Wednesday.

Each firm must remedy its deficiencies by Oct. 1 or face stricter regulations, such as higher capital requirements or limits on business activities, the agencies said. If a firm has not done so, it may be subject to more stringent prudential requirements.

“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 news release.

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Citigroup’s resolution plan passed the test, although the FDIC and Federal Reserve identified shortcomings that the firm must address. Goldman Sachs and Morgan Stanley avoided potential sanctions because their plans were not given joint determinations.

The determinations against the five banks that failed the test cited deficiencies involving liquidity, governance and operations.

While JPMorgan, for example, has “made notable progress in a range of areas,” the agencies said it “has key vulnerabilities,” including an inability to estimate the liquidity needed and available for funding bankruptcy resolution and insufficient resources for winding down derivatives.

The regulators also said Wells Fargo must demonstrate a “robust process to ensure quality control and accuracy” in its plan and show how different lines of business can be restructured and its regional units can be separated.

“The move officially starts a long regulatory chain that could end with breaking up the banks,” Reuters said. “Nearly a decade after the financial crisis, it underscored how the debate about banks being ‘too big to fail’ continues to rage in Washington and exasperate on Wall Street.”