Banks have failed to convince the Federal Deposit Insurance
Corp. (FDIC) and the Federal Reserve regarding their respective
'Living Wills', a measure to prove that they could be easily be
wound down in case of collapse. Both the regulatory agencies deemed
the living wills of the banks inadequate, after reviewing their
plans submitted in 2013.
Under provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the banks (with total consolidated assets of $50
billion or more) are required to outline the ways to liquidate by
breaking up and selling off assets if they are on the verge of
The U.S. banks that had submitted their living wills are Bank of
America Corporation (
), The Bank of New York Mellon Corporation (
), Citigroup Inc. (
), The Goldman Sachs Group, Inc. (
), JPMorgan Chase & Co. (
), Morgan Stanley (
) and State Street Corporation (
). Apart from these, the U.S. units of Barclays PLC (
), Credit Suisse Group AG (
), Deutsche Bank AG (
) and UBS AG (
) had also submitted their resolution plans.
Though the FDIC and the Fed noted some degree of improvement from
the living wills previously submitted in 2012, still several
shortcomings needed to be addressed. There were flaws in plans of
particular banks along with many common errors. All the 11 banks
have been individually notified.
According to the regulators, the shortcomings stemmed from the fact
that the living wills were based on certain unrealistic and
inadequate assumptions. These included the behavior of clients,
investors, counterparties and customers, among others during the
crisis. Further, the banks failed to identify structural changes
that will aid their wind-down.
Notably, several actions to make the living wills more purposeful
were suggested by the FDIC and the Fed. These include simplifying
the businesses and amending financial derivative contracts so as to
offer stay of early termination rights of investors, which get
triggered in bankruptcy.
The banks have been given a deadline of Jul 1, 2015 to submit their
modified living wills. In case they fail to do the same, the
regulators will be compelled to order the banks to divest units for
downsizing the business structure.
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 will reduce the risks of
further bailouts, if these banks sink in the event of another
A systemic resolution, maximizing the sale value of a failed bank
and minimizing creditor losses, would help in efficient handling of
bank failures. Moreover, the FDIC will have the power to liquidate
a bank if its collapse knocks down the country's financial
Moreover, unlike a one-time affair, the living wills are required
to be submitted on a yearly basis.
Will the Purpose of 'Living Wills' be Served?
Since almost all banks are dependent on each others' businesses, a
single breakdown among them would cause ripples all over the
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 lesser involvement of taxpayers' money for bailing
out troubled financial institutions.
Moreover, the banks have been simplifying their operations through
divestiture or closure of non-core/unprofitable businesses. We
believe that these efforts, along with several other measures being
undertaken by the financial regulators will aid in averting a
financial crisis (similar to 2008) to some extent.
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