The Federal Deposit Insurance Corp. (FDIC) and the Federal
Reserve partially released the so-called 'living wills' of the nine
major global banking giants. Under the provisions of the Dodd-Frank
Act, the banks were required to outline the ways to liquidate by
breaking up and selling off assets if they are on the verge of
collapse.
The nine global banks that submitted resolution plans or the
professed 'living wills' are
Goldman Sachs Group Inc.
(
GS
),
Bank of America Corp.
(
BAC
),
JPMorgan Chase & Co.
(
JPM
),
Citigroup Inc.
(
C
),
Morgan Stanley
(
MS
),
Barclays PLC
(
BCS
),
Deutsche Bank AG
(
DB
),
Credit Suisse Group
(
CS
) and
UBS AG
(
UBS
). Further, by the end of next year, more than 100 banks will be
submitting their resolution plans to the regulators.
A Brief Synopsis of Individual Living Wills
The details released by the regulators in the public domain
revealed quite a few facts that are already recorded by the banks
while filing their annual and quarterly reports with the Securities
and Exchange Commission (SEC).
Amid a financial crisis, Bank of America, Goldman Sachs and Credit
Suisse plan to sell off their respective assets to a wide range of
buyers -- national, international and regional financial
institutions, hedge and private equity funds along with other
financial asset buyers and other banks. However, UBS concluded that
only large firms would be able to purchase its businesses in the
event of a collapse.
In its resolution plan, JPMorgan provided some procedures for
systematic dismantling of its businesses that would eliminate every
systematic risk to the financial system. Another U.S. banking giant
with international operations, Citigroup, stated that it would
separate its banking unit from other operations and then will file
for a bankruptcy while disposing off other operations. In the
meantime, its banking unit - Citibank NA - will continue to
function as a banking institution.
Likewise, Morgan Stanley, Barclays and Deutsche Bank summed up
their resolutions of selling assets and unrelated operations in
case they fail. Overall, all the banks concluded that if they are
on the brink of failure, the taxpayer money will not be required to
revive them.
Purpose of 'Living Wills'
The main idea behind the submission of living wills is to avoid
re-run of the 2008 financial crisis, the period when Lehman
Brothers Inc. went down. The living wills are required in a bid to
reduce the risks of further bailouts, if these banks sink in the
event of another financial crisis.
A systemic resolution would make it easier for the regulator to
address bank failures efficiently, maximizing the sale value of a
failed bank and minimizing creditor losses. Moreover, the FDIC will
have the power to liquidate a bank if its collapse knocks down the
country's financial stability.
Last year, the FDIC mandated all large banks of the nation, with
assets of at least $50 billion, to submit living wills effective
January 1, 2012. Additionally, the dates for filing the wills
extended to July 1, 2012 for institutions with more than $250
billion in non-bank assets and July 1, 2013 for institutions with
non-bank assets between $100 billion and $250 billion.
Moreover, this is not a one-time affair. Banks will be required to
submit the living wills on a yearly basis.
Will 'Living Wills' Serve its Purpose?
As per the arrangement, the markets will continue to function
normally even if these big banks collapse. Additionally, there
would be buyers who will readily make large acquisitions without
any government bailout. However, there was no such arrangement when
financial giants like Lehman Brothers, Washington Mutual and Bear
Stearns Co. collapsed in 2008.
However, since almost all banks are dependent on each others'
businesses, if even one of these collapse, there would be rippling
effects on the overall financial market. As a result, there will be
limited number of healthy financial institutions to buy assets from
the weaker ones. So, the outcome will not change to a great extent.
However, living wills will hopefully prevent big banks from messing
around with risky activities that jeopardize general economic
health. Most importantly, the advance precautions would ultimately
translate into less involvement of taxpayers' money for bailing out
troubled financial institutions.
BANK OF AMER CP (BAC): Free Stock Analysis
Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
MORGAN STANLEY (MS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
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